Harnessing Blockchain for Sustainable Development: Prospects and Challenges

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

HARNESSING BLOCKCHAIN FOR SUSTAINABLE DEVELOPMENT: PROSPECTS AND CHALLENGES

Layout and Printing at United Nations, Geneva – 2107616 (E) – June 2021 – 1,018 – UNCTAD/DTL/STICT/2021/3 UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

HARNESSING BLOCKCHAIN FOR SUSTAINABLE DEVELOPMENT: PROSPECTS AND CHALLENGES

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United Nations publication issued by the United Nations Conference on Trade and Development.

UNCTAD/DTL/STICT/2021/3 and Corr.1

ISBN: 978-92-1-113020-1 eISBN: 978-92-1-403043-0 Sales No.: E.21.II.D.16 Acknowledgements iii

ACKNOWLEDGEMENTS

This study was prepared by an UNCTAD team, comprised of Clovis Freire (team leader), Abiy Solomon, Maria Godunova, Weijing Ye and Ronak Shahsavar, with contributions from Solomon Anzagra, Thomas Van Giffen, Olivier Combe and Rasim Alam (Harvard Kennedy School). The authors worked under the supervision of Liping Zhang, Chief of the Science, Technology and Innovation Policy Section, and the guidance of Ángel González Sanz, Head of the Science, Technology and ICT Branch, and under the overall direction of Shamika N. Sirimanne, Director of the UNCTAD Division on Technology and Logistics.

UNCTAD appreciates valuable inputs provided by the Governments of Austria, Belgium, Cuba, Finland, the Islamic Republic of Iran, Kenya, Latvia, Portugal, Romania, the Russian Federation, Saudi Arabia, Switzerland, Thailand, Turkey and the United Kingdom of Great Britain and Northern Ireland, as well as from United Nations Economic and Social Commission for Asia (ESCAP), United Nations Economic and Social Commission for Western Asia (ESCWA), Food and Agriculture Organization of the United Nations (FAO), International Trade Centre (ITC), International Telecommunication Union (ITU), United Nations Economic Commission for Europe (UNECE), United Nations Industrial Development Organization (UNIDO), United Nations World Food Programme (WFP) and World Intellectual Property Organization (WIPO).

The publication benefited significantly from discussions and inputs during the 2020–2021 Intersessional Panel of the United Nations Commission on Science and Technology for Development (18 to 22 January 2021).

Magali Studer designed the cover. Malou Pasinos provided administrative support. iv Harnessing rapid technological change for inclusive and sustainable development

NOTE

The United Nations Conference on Trade and Development (UNCTAD) serves as the lead entity within the United Nations Secretariat for matters related to science and technology as part of its work on the integrated treatment of trade and development, investment and finance. The current UNCTAD work programme is based on the mandates set at quadrennial conferences, as well as on the decisions of the General Assembly of the United Nations and the United Nations Economic and Social Council that draw upon the recommendations of the United Nations Commission on Science and Technology for Development, which is served by the UNCTAD secretariat. The UNCTAD work programme is built on its three pillars of research analysis, consensus-building and technical cooperation, and is carried out through intergovernmental deliberations, research and analysis, technical assistance activities, seminars, workshops and conferences.

This series of publications seeks to contribute to exploring current issues in science, technology, and innovation, with particular emphasis on their impact on developing countries. Table of contents v

CONTENTS

I. Introduction...... 1

II. The blockchain technology...... 2

A. What is blockchain?...... 2

B. Applications, status and trends...... 5 1. Cryptocurrencies, tokens and online payments...... 5 2. Decentralized finance ...... 6 3. International trade...... 6 4. Value chains...... 8

III. Blockchain’s ecosystems of innovation...... 10

A. Types of innovation...... 10 1. Cryptographic innovations...... 10 2. Layer 1 software infrastructure...... 10 3. Layer 2 software infrastructure...... 11 4. Hardware ...... 11 5. Governance and business models...... 11 6. Innovations in regulations...... 11

B. Ecosystem of innovation...... 11

C. Financing blockchain innovation...... 14

IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals ...... 15

A. Examples of blockchain applications that contribute to the Sustainable Development Goals...... 15

B. Forward-looking scenarios...... 19 1. Decentralized applications overtake centralized ones...... 19 2. Applications are developed for financial inclusion...... 20 3. Efficiency increases in international digital transactions...... 21 4. Cryptocurrency replaces fiat money...... 22 5. Blockchain becomes the “new Internet”...... 26

C. Potential unintended consequences...... 28 1. Environmental impact...... 28 2. Criminal activities...... 30 3. Inequality...... 31 4. Privacy...... 32 vi Harnessing rapid technological change for inclusive and sustainable development

V. Harnessing blockchain for sustainable development ...... 33

A. Building capacities for strengthening the national system for blockchain innovation...... 33 1. Low- and lower-middle-income developing countries...... 34 2. Upper-middle-income developing countries ...... 37 3. High-income countries...... 40 B. Creating the regulatory environment for support blockchain innovation while addressing potential risks...... 42 1. Privacy security and data protection...... 43 2. Financial regulations...... 44 3. Intellectual property regulations...... 44

VI. International collaboration...... 46

A. Sharing knowledge and information and conducting research...... 46

B. Helping to set guidelines, norms and standards ...... 46 C. Helping build the capacity of Governments to play its role in the blockchain ecosystem, including in terms of oversight capabilities ...... 47

D. Using blockchain in United Nations operations...... 48

Annex �� 50

Blockchain glossary...... 50

References...... 54 vii

LIST OF BOXES

Box 1 How blockchain works ...... 3

Box 2 Ethereum ...... 4

Box 3 ASYCUDA and blockchain...... 7

Box 4 Examples of applications of blockchain in supply chains...... 9

Box 5 Innovation in Ethereum...... 10

Box 6 Examples of the ecosystems of blockchain innovation...... 13

Box 7 Blockchain for climate change solutions...... 30

Box 8 National blockchain associations and laboratories...... 35

Box 9 Blockchain use cases in Uganda ...... 36

Box 10 Turkey: Blockchain-based Next Generation Decentralized Digital Identity Infrastructure ...... 37

Box 11 National strategies for blockchain development...... 38

Box 12 GovTech: Using blockchain to support the Sustainable Development Goals in Portugal...... 41

Box 13 Blockchain’s supportive business climate in Latvia...... 41

LIST OF FIGURES

Figure 1 The evolution of blockchain...... 4 Figure 2 Market shares of cryptocurrencies, October 2020 ...... 5 Figure 3 Share of total funds locked in DeFi, by DeFi project ...... 6

Figure 4 Bitcoin: Money supply and inflation...... 23

Figure 5 Price volatility of bitcoin...... 24

Figure 6 Comparison between Bitcoin and other assets on the global market...... 25

Figure 7 Recurring phases in the blockchain innovation cycle...... 27 Figure 8 Consumption of energy by Bitcoin ...... 29

Figure 9 Share of coins and addresses by balance...... 31

LIST OF TABLES

Table 1 Examples of blockchain applications that contribute to the Sustainable Development Goals...... 16 Table 2 Rate of annual return of bitcoin...... 24 Table 3 Environmental impact of Bitcoin...... 29 Table 4 Mechanisms through which blockchain might support environmental sustainability...... 29

I. Introduction 1

I. INTRODUCTION

In an increasingly digitalized economy and society, speculative gains in cryptofinancial assets instead of the security and accountability of data transactions creating real value through new products and services. are critical elements for creating trust and enabling Such behaviour, combined with the lack of regulation breakthrough innovations in the digital world. In this and the swift pace of innovation, is a receipt for financial regard, blockchain technology could be a game-changer, bubbles and bursts. with the potential to revolutionize processes from finance to pharmaceutical industries, from government public At the same time, blockchain is potentially a key services to humanitarian work and development aid. technology in a new technological paradigm of increasing The blockchain serves as the base technology for automation and integrating physical and virtual worlds, cryptocurrency, enabling open (peer-to-peer), secure together with technologies such as artificial intelligence and fast transactions. The blockchain application has (AI), robots, and gene editing. In such a scenario of the expanded to include various financial transactions (e.g., very early stages of this new paradigm’s installation online payments and exchange platforms), Internet of period, it is still not clear the real long-impact of things (IoT), health systems and supply chains. these technologies on the economy, societies and environment. Similar moments in the past technological However, issues associated with scalability, privacy revolutions offered windows of opportunity for some concerns, uncertain regulatory standards and difficulties developing countries to catch up and others to forge posed by technology integration with existing applications ahead. Therefore, Governments of developing countries are some of the potential market constraints. There is should seek to strengthen their innovation systems to also the risk that the potential of blockchain for solving strategically position themselves to benefit from this developmental problems has been somewhat inflated new wave of technological change. by its early adopters and the technology media and may not be as applicable for developing and least The paper is structured as follows. Chapter II sets developed countries. the stage by briefly presenting blockchain technology. Chapter III discusses the ecosystem of innovation What are the emerging uses of blockchain that can related to blockchain technologies. It discusses the be breakthroughs in accelerating progress towards types of blockchain innovation, main actors, networks Sustainable Development Goals? What are the potential and interlinkages that they form to exchange knowledge, adverse unintended social and economic effects of this learn and innovate. Chapter IV discusses how blockchain technology? How could Governments maximize the could impact the Sustainable Development Goals, opportunities and minimize the risks? focusing on how possible scenarios could play out and their effect on sustainable development. Chapter The paper’s main messages are that blockchain V discusses the challenges that Governments face and technology can be used in many applications that could what they could do to influence the rate and direction contribute to sustainable development. However, at this of innovation and competence building in blockchain moment, blockchain innovation has focused on financial to contribute to their national development priorities applications dissociated from the real economy. For and accelerate the progress towards the Sustainable most of the innovations in this field, the Goal is to profit Development Goals. And chapter VI discusses areas by extracting rents through financial intermediation and for international collaboration. 2 Harnessing rapid technological change for inclusive and sustainable development

II. THE BLOCKCHAIN TECHNOLOGY

A. WHAT IS BLOCKCHAIN? permissions, which divides blockchains into two basic categories: public and private blockchains. A public Blockchain technology was invented to create Bitcoin. (or permissionless) blockchain is one where anyone Introduced to the world in 2008, in a White Paper titled can read all transactions taking place, and anyone can “Bitcoin: A Peer-to-Peer Electronic Cash System” participate in the network and help maintain the ledger. published under the pseudonym Satoshi Nakamoto, Bitcoin is implemented in a public blockchain. In a private whose true identity has never been revealed, bitcoin is (or permissioned) blockchain, both the information and defined as “a purely peer-to-peer version of electronic maintenance of the network are restricted to a selected group of known participants. Private ledger technology is cash [that] would allow online payments to be sent typically applied in enterprise use cases where immutable directly from one party to another without going through transactions are required and can be verified only by a a financial institution” (Nakamoto, 2008). The stated few nodes (United Nations/CEFACT, 2020). Goal of Bitcoin was to reduce transaction costs, fraud and payment uncertainties in digital transactions. It was proposed as an alternative to the prevalent model of While the Bitcoin network only records transactions e-commerce that relies on financial institutions serving of cryptocurrency, second-generation blockchains as trusted third parties to process electronic payments. (Blockchain 2.0) expand it by allowing the record of computer code in the ledger (figure 1). It is like creating a distributed hard drive that stores computer code that Therefore, the technical problem that blockchain can be executed in the nodes of the network. Thus, for technology was invented to solve was creating a ledger instance, instead of only registering that a payment has (register of payments) online without a central node that been made, the blockchain can store “smart contracts” has control over the information in the ledger. One of that are executed automatically when their conditions the Bitcoin protocol’s security concerns is the double- are met. The incorporation of smart contracts enables spending problem; a person spending the same Bitcoin business functions involving the transfer of information more than once. Blockchain solves that problem in a and value while leaving transparent and reliably auditable distributed ledger through an ingenious combination information trails (United Nations/CEFACT, 2020). of blocks of data, cryptography and an algorithm for network nodes to reach a consensus about the ledger’s Smart contracts were first implemented in a platform transactions, the proof-of-work (PoW) consensus called Ethereum, an open-source distributed computing distribution algorithm (see box 1). platform featuring smart contracts for decentralized applications (DApps). The idea of Ethereum was Being a digital asset without any intrinsic value and introduced in 2013 in a White Paper titled “A Next- central controller or issuer, Bitcoin is regarded as ground- Generation Smart Contract and Decentralized Application breaking in the evolution of fiat currencies (BIS, 2020). Platform” released by Vitalik Buterin, a then 19-year-old It laid the foundations of blockchain technology and Russian–Canadian programmer. Buterin proposed the enabled the development of other cryptocurrencies. development of a new platform “allowing anyone to write These other cryptocurrencies are implemented using smart contracts and decentralized applications where variations of blockchain, which can differ substantially they can create their own arbitrary rules for ownership, from the way that Satoshi Nakamoto initially proposed transaction formats and state transition functions” it. Thus, many prefer to use the more general term (Buterin, 2013) (see box 2 for more information regarding Distributed Ledger Technologies (DLT) when referring Ethereum). The blockchain is called Ethereum and Ether to other blockchain implementations. In this paper, both (ETH) is the cryptocurrency token generated by Ethereum terms are used interchangeably. A list of terms related to miners as a reward for computations performed to the blockchain is presented in the blockchain glossary secure the blockchain. In October 2020, Ethereum was in the annex to this publication. the second-largest cryptocurrency platform by market capitalization, behind Bitcoin.1 An example of the variations in the implementation of blockchain is related to the network’s management and 1 See https://www.blockchain.com. II. The blockchain technology 3

Box 1 How blockchain works When a node in a network makes or receives payments from another node, it sends the information about this transaction to all other nodes in the network. This information basically says that payment of value X was made from node A to node B at a specific time. That transaction is then registered in the distributed ledger by a third node, which is called a miner, who verifies the validity of the transaction by solving a very complex computational math problem. Transactions are registered in blocks, many transactions at a time. Given that these blocks of transactions can be created by different nodes in the network, a new block must somehow be connected to the previous blocks. In a blockchain, each new block is “chained” to the previous blocks using a cryptographic signature. This signature is easy to verify but extremely difficult to replicate. It is created using a cryptographic technique called hashing, which takes large amounts of data as input and creates a unique identifier known as the “hash value” or “digital fingerprint”. With hashing, it is impossible to recreate the data that generated the hash value. Nodes that generate new blocks are called miners because they are rewarded with newly created (mined) bitcoins for the trouble of generating a new block of transactions. Given that more than one miner in the network can create a new block using this technique, a consensus mechanism is used to select which potential new block is considered by all participants as the “agreed” new block of transactions in the blockchain. Bitcoin uses a proof-of-work (PoW) consensus distribution algorithm, in which each node that generates a new block must prove that it has worked in a cryptographic challenge. The challenge is to generate a hash value of the blockchain with a sequence of zeros of a certain length at the beginning (e.g., 19 zeros). This is not an easy task, and miners must try different ways of combining transactions in a block, adding strings of data to the block to try to create the hash with leading zeros. The difficulty of this challenge is set by the blockchain algorithm, based on the number of transactions and nodes, so that a new block is generated on average every 10 minutes regardless of the number of transactions, nodes, or computer power used for mining. If two nodes solve this challenge, the node that generated the longer blockchain is considered by all other nodes as the one that has created the new block in the blockchain. One of the threats to the blockchain is the Sybil or 51 per cent attack, which occurs when a malevolent actor controls a majority of the nodes, then it could decide to reach a consensus in contradiction of the interests of other participants of the network. Source: UNCTAD, based on Nakamoto (2008) and United Nations Innovation Network (2019).

The latest technological advances in blockchain are However, some technical limitations of Bitcoin and clustered around what could be called Blockchain Ethereum such as high transaction fees and limited 3.0, which focus on addressing the drawbacks of the scalability, prevent blockchain’s first two generations previous two generations of blockchain technology, from a general application within Industry 4.0. Blockchain such as scalability and interoperability between 3.0 is comprised of blockchain innovations to enable different blockchains (Ackermann and Meier, 2018). fast, large-scale applications. For example, one of the For example, blockchain can potentially support most innovations is the proof-of-stake (PoS) protocol, the of the applications of Industry 4.0 including supply chain consensus distribution algorithm in which the eligibility and trade across manufacturing, food, pharmaceutical, of creating a new block is determined by the amount health and creative industries through integrating varied a node has invested in the network. This innovation systems, managing commercial transactions and reduces the time required for the creation of a new fostering the assets’ traceability (Bodkhe et al., 2020). block, increasing the performance of the applications. 4 Harnessing rapid technological change for inclusive and sustainable development

Figure 1 The evolution of blockchain

More Functionality

Smart Contracts Larger-scale of applications of non cryptocurrency-related More nancial functionality than Distributed Ledger Technology simply being a cryptocurrency (DLT) transactions processor Improved performance with more Cryptocurrency Decentralized applications scalability and interoperability (DApps) based on programmable The foundation of blockchain language technologies Proof-of-stake (PoS) protocol

Cryptocurrency blockchains Autonomously executing algorithms Peer-to-peer decentralised . cryptocurrency transactions Proof-of-work (PoW) protocol Proof-of-work (PoW) protocol . .

Source: UNCTAD.

Box 2 Ethereum Ethereum can be considered as a distributed computer, the Ethereum Virtual Machine (EVM). The Ethereum protocol keeps the EVM running (Ethereum Virtual Machine (EVM), 2020). The EVM begins with an initial state and continuously execute transactions to morph it into the current state. It is this current state that is accepted as the canonical “version” of the world of Ethereum, and at any given block in the chain, Ethereum has only one ‘canonical’ state. The state can include any information that can be represented by a computer such as account balances and trust arrangements (Wood, 2020). Each transaction on Ethereum requires computational resources to execute; thus, each transaction requires a fee. The term “Gas” refers to the unit that measures the amount of computational effort required to execute specific transactions on the Ethereum network successfully. Gas fees are paid in Ether, and its prices are denoted in Gwei, which itself is a denomination of Ether: each Gwei is equal to 0.000000001 ETH. The price of the gas is determined by the demand for resources on the network; the amount of gas depends on the computational efforts needed and the time to execute a transaction. Miners can decline to process a transaction if the gas price does not meet their threshold. Requiring a fee for every transaction executed on the network helps prevent actors from spamming the network. The reason for introducing gas as a distinct value or separate unit than Ether is to maintain a distinction between the actual valuation of the cryptocurrency and the computational expenses on the Ethereum network (Ethereum: Gas and fees, 2020). In 2016, US$50 million in Ether was stolen by an anonymous hacker. To return the amount stolen to their rightful owners, the Ethereum platform was divided (forked) into two versions: the new version became Ethereum (ETH), and the original chain, Ethereum Classic (ETC) (Waters, 2016). The Ethereum Foundation (EF) is the organization dedicated to supporting Ethereum and related technologies. It is a non-profit organization based in Switzerland with the mission to contribute to Ethereum’s long-term success by promoting and supporting Ethereum-related technologies’ research, development, and community. Ethereum Foundation’s reported role is not to control Ethereum, but to allocate resources, both financial and non-financial, to critical projects, to be a valued voice within the Ethereum ecosystem and to advocate for Ethereum to the outside world (Ethereum Foundation, 2020). Source: UNCTAD. II. The blockchain technology 5

B. APPLICATIONS, STATUS AND TRENDS systems with fast, cheap and secure transactions and without intermediaries. There are many projects According to some estimates, the market for blockchain in this space, such as Bitcoin, Litecoin, EOS, NEO, solutions and applications was around US$708 million Ripple, Dash, and more recently, Facebook’s Libra. in 2017, and it is expected to reach over US$60 billion In addition to cryptocurrencies such as Bitcoin and in 2024 (MarketWatch, 2019). Blockchain can be used Monero, they also include protocol tokens (e.g. Ether), in virtually any application. Currently, the prominent utility tokens, securities tokens (e.g. cryptoequities, use cases for blockchain applications are in the areas cryptobonds), natural asset tokens, cryptofiat currencies of online payments, finance, international trade, and and stablecoins (for a discussion on the advantages and global value chains. In the demand side, the growth of disadvantages of cryptocurrencies as opposed to other blockchain market is mainly driven by factors such as forms of currency, traditional or digital, see chapter IV). increasing online transactions, digitization of currency, secure online payment gateways, the growing interest In October 2020, there were about 1,000 cryptocur- of the banking, financial services and insurance sector, rencies in the market. This number was lower than in and an increasing number of merchants accepting 2018 when there were more than 1,500. Many still cryptocurrencies (Grand View Research, 2019). have a negligible market capitalization (figure 2). Only 17 have a market capitalization of more than US$1 bil- 1. Cryptocurrencies, tokens and online lion and 46 have a market capitalization higher than payments US$100 million. The total capitalization of the 100 most valued cryptocurrencies is about US$330 bil- The first and probably the best-known application lion, in which Bitcoin accounts for US$200 billion of blockchain technology is to build online payment (CoinMarketCap, 2020).

Figure 2 Market shares of cryptocurrencies, October 2020 (Percentage)

Monero, 1 EOS, 1 Other, 13 Cardano, 1 Litecoin, 1 Bitcoin SV, 1 Polkadot, 1 Binance Coin, 1 Bircoin Cash, 1

XRP, 4 Bitcoin, 63

Ethereum, 12

Source: UNCTAD, based on coinmarketcap.com. Note: “Other” represents more than 1,000 other cryptocurrencies exchanged in October 2020. 6 Harnessing rapid technological change for inclusive and sustainable development

In terms of transactions, in October 2020, the number of Figure 3 Bitcoin transactions per day was about 300 thousand,2 Share of total funds locked in DeFi, by DeFi project while, for comparison, the credit card company Visa (Percentage) handles more than 65,000 transactions per second, which is more than 5.6 trillion transactions per day (Visa, alancer 2018). In 2018 there were 460 million Bitcoins wallets in ther total with only 25 million wallets holding bitcoins,3 while there were 3.3 billion Visa cards worldwide in the same period (Visa, 2018). nia 2. Decentralized finance ntheti Decentralized finance (DeFi) is currently the area with a great amount of innovation. DeFi refers to blockchain- und based financial instruments run by smart contracts – which automatically execute transactions if certain conditions are met - that expand the use of blockchain ure inance aer from simple value transfer to more complex financial use cases without any intermediaries. For instance, if a user wants her money to be sent to another user ae next Tuesday, but only if the US$/EUR exchange rate Wraed ircin is higher than 0,85 according to xe.com, such if-else or if-then instructions can be embedded in smart contracts. Applications use smart contracts in platforms such as Source: UNCTAD, based on data retrieved from defipulse.com Ethereum to create currency exchanges, yield farms, microcredit applications, insurance, etc. in continuous and steady growth; the current value is about US$11.06 billion, and the top 10 DeFi projects In November 2020, there were 251 DeFi projects listed represent 94 per cent of the total (figure 3).6 in DeFiprime.com, a media outlet and analytical services provider for the DeFi community. Among them, 203 3. International trade were built on Ethereum blockchain, 26 on Bitcoin and the remaining 22 built on EOS – another blockchain- Blockchain technology could improve nearly all aspects of based decentralized platform for the development international trade. Smart contracts allow for automatic, of DeFi applications.4 The market capitalization of speedy, and timely issuance of customs invoices, permits, the top 100 DeFi tokens was about US$12.7 billion, licences and certificates triggered after payments of fees wherein the market value of the top 10 DeFi tokens was and duties. This could cut down the back-office duties US$9.1 billion, accounting for 71 per cent of the total.5 required to ensure reconciliation of duty payments by traders, reduce consignment clearance time and Another relevant measure of market prospects for DeFi is improve government revenues by reducing the potential the amount of “locked” funds in DeFi, which are the funds for corruption. that users have trusted to send to the smart contracts that sustain the DeFi ecosystem. (ConsenSys Codefi, There are fewer blockchain applications in this area 2020). An increasing amount of locked funds in DeFi as compared with online payments and decentralized over time represents growing confidence among users finance, and many are in the stage of proof-of-concept. to place their money into smart contracts to interact They involve complex procedures such as customs with these new financial tools. Available data indicate clearance, as well as several operations, types of that the total value of funds locked in DeFi projects is documents and many stakeholders such as customs, partner governmental agencies (PGAs), customs brokers, 2 See https://www.blockchain.com. carriers, banks, insurance companies (see box 3 for 3 See https://blog.chainalysis.com/reports/bitcoin-addresses. further information on the context of the UNCTAD 4 See https://defiprime.com/ethereum (accessed on 4 Novem- ber 2020). Automated System for Customs Data – ASYCUDA). 5 See https://coinmarketcap.com/defi/ (accessed on 16 Octo- ber 2020). 6 See https://defipulse.com (accessed on 16 October 2020). II. The blockchain technology 7

Box 3 ASYCUDA and blockchain International trade more and more considers blockchain to ensure secure, trustworthy services and information exchange without costly intermediation. Customs clearance and single window systems that connect several trade stakeholders (ministries, cross-border regulatory agencies, government agencies) and exchange information with other systems (e.g. customs clearance systems for regional transit monitoring) would benefit from blockchain and the ASYCUDA programme has started to work on several practical applications.

Within the context of process automation and procedure streamlining, a blockchain acts as a process coordinator improving efficiency. With the implementation of smart contracts, secure transactions can be executed automatically in the blockchain. In a complex procedure such as customs clearance that involves several operations, types of documents, many stakeholders such as customs, partner governmental agencies (PGAs), customs brokers, carriers, banks and insurance companies, reducing unnecessary human action through smart contracts would allow faster execution and automatic compliance with rules and laws; leading to more automation, fewer corruption thanks to less human interaction (Sustainable Development Goal 16), and further implementation of paperless processes (Sustainable Development Goal 15).

In the context of the COVID-19 pandemic, these benefits can contribute to the risk mitigation efforts and measures. The payment of taxes is a great example of how blockchain and smart contracts can help; the same approach can be used for the release of guarantee after a transit procedure is completed or for the transfer of the ownership of goods in a warehouse. Not only the payment of taxes could be more secure (data cannot be corrupted) and instantaneous, but it could also be automatically executed once a declaration is registered in the system without any further human action required. Blockchain may also improve risk management, ensuring the integrity of permits, licenses and certificates and, consequently, of the value of the goods. Verification of goods could be shortened, and more efficient (Sustainable Development Goal 6) and the accurate and timely collection of taxes and duties achieved (Sustainable Development Goal 1). Combining the blockchain with another technology like IoT could be of particular interest when it comes to risk management. For instance, it can shorten the time of examination of a container thanks to the tracking of movements, temperature and opening of doors. For food, this combination guarantees security and safety, directly contributing to Sustainable Development Goals 2 and 3.

Developing countries, where efficiency and trust are low, can benefit the most from blockchains. However, the technical infrastructure needs to be assessed and the system requirements specified for a technical upgrade where appropriate, which can be pricey, especially for economies with limited financial resources such as LDCs. In that context, many member States will seek financing from donors, making donor coordination a key aspect to success. The capacity-building component will be more important and complex in the context of a technical assistance project. Indeed, UNCTAD and ASYCUDA aim at ensuring system and data ownership by the country, which can only be reached through intensive training. By limiting or removing intermediation, blockchain will directly contribute to reducing trade costs. Nevertheless, developing countries’ exports rely heavily on intermediation to access foreign markets, which poses the question of the future role of intermediaries.

Source: UNCTAD.

Numerous companies and Governments are already already started testing DLT to speed up efficiency in their forming consortia and alliances to deploy the blockchain work.9 Tradelens,10 the IBM and Maersk-led consortium technology in various areas of international trade. of leading firms in the shipping and maritime industry, Several companies are also experimenting with the already leverages the technology in some areas of its technology with their in-house technical teams. For ecosystem and has successfully trialled an electronic instance, in 2018, the first blockchain-based Smart Bill of Lading on the platform(e-BL).11 These efforts Bill of Lading was issued by CargoX for goods that are fast ramping up with more shipping and maritime departed from Shanghai to the Port of Koper, Slovenia,7 industry leaders taking the initiative to bring together at a little fraction of the usual cost of sending paper competitors to collaborate for increasing efficiency. documents through courier services across the globe. The Global Shipping Business Network (GSBN)8 has 9 See https://smartmaritimenetwork.com/2019/07/16/global- 7 See https://www.marineinsight.com/shipping-news/first-ever- shipping-business-network-agreements-signed/. blockchain-based-cargox-smart-b-l-successfully-completed- 10 See https://www.tradelens.com/. its-historic-mission/. 11 See https://worldmaritimenews.com/archives/277649/cma- 8 See https://www.cargosmart.ai/en/solutions/global-shipping- cgm-msc-to-become-members-of-tradelens-blockchain-plat- business-network/. form/. 8 Harnessing rapid technological change for inclusive and sustainable development

4. Value chains project on Ethereum to facilitate the onboarding process for Coca-Cola bottling suppliers. By August 2020, 12 of As value chains grow more intricate, involving the largest North American Coca-Cola bottlers were diverse stakeholders and relying on several external using the blockchain platform for internal supply chain intermediaries, blockchain can be used to improve the management and the nodes are expected to expand transparency, traceability and reliability throughout the to external suppliers (Haig, 2020). value chains by reducing information asymmetries, tracking inventories and ownership rights of products, Outside the food industry, a blockchain-enabled platform enabling faster and more cost-efficient delivery of goods, developed by Everledger, a technology company, and enhancing coordination between stakeholders (Gaur recorded the provenance of over 2 million diamonds and Gaiha, 2020; Allen et al., 2018). along the supply chain. With a unique digital identity for every diamond, the platform can track and confirm While blockchain-driven value chain use cases are the source and location of each diamond, preventing still emerging, several successful proof-of-concept possible fraud and counterfeit.12 implementations suggest that blockchain will likely lead to disruptive transformations, ranging from cost-savings Another promising area for blockchain solutions and increased efficiencies to new operational models is provenance within the pharmaceutical industry. (see box 4 for examples). Tracking goods through the Counterfeit pharmaceuticals pose serious risks for production and delivery process to ensure quality and customers and society. According to the World Health authenticity or automated compliance to freight and Organization, an estimated 10–30 per cent of medicines trade regulations exemplify just two promising blockchain sold in developing economies are counterfeits and applications in value chains. every year more than 120,000 people die in Africa as a result of fake anti-malarial drugs (WHO, 2017). For instance, in response to food contamination Countries like Saudi Arabia are committed to exploring scandals worldwide, Walmart has teamed up with the role of blockchain technology in the sustainability IBM in tackling food safety in the supply chain using and effectiveness of the pharmaceutical supply chain, blockchain technology. Using the IBM Hyperledger addressing problems such as medication shortage, lack Fabric, a blockchain-based platform, Walmart has of coordination among health-care stakeholders, product successfully completed two blockchain pilots: pork in wastage and lack of medication demand information.13 China and mangoes in the Americas. With a farm-to-table approach, Walmart’s blockchain solution has reduced In summary, blockchain potentially reduces time for tracking mango origins from seven days to 2.2 transactional complexity, information asymmetry and seconds and promoted greater transparency across contractual incompleteness, value chain risks decrease Walmart’s food supply chain (Kamath, 2018). Other large due to traceability, transparency, and openness of companies are also exploring blockchain use cases. transactions and agreement records (Schmidt and For example, Coke One North America has started a Wagner, 2019).

12 See https://www.everledger.io/our-technologies/blockchain- and-more/. 13 Contribution from the Government of Saudi Arabia available at https://unctad.org/system/files/non-official-document/ CSTD_ 2020-21_c27_B_Saudi%20Arabia_en.pdf. II. The blockchain technology 9

Box 4 Examples of applications of blockchain in supply chains FAO is supporting innovations in the supply chain through cooperation with other stakeholders which focus on agriculture and livestock, fisheries, forestry, conservation and rural development. In collaboration with ITU, national partners and technical service providers, FAO conducted a pilot project on pigs (livestock) using blockchain to create a database for traceability in Jiwaka, Papua New Guinea. Pig farmers were registered, and their pigs were ear-tagged with radio frequency identification (FRID) enabled tags linked to a traceability database. Farmers participate by inputting data (breed type, feed type, geography, incidences of pig disease and remedy) into the system until the pigs are ready for sale. Potential buyers can visit the pig selling points with an application and scan the ear-tags to access and view the history before making decisions. The integration of the blockchain technology in traceability enhances the sustainability of the livestock traceability system and the development and maintenance of similar block-chain-derived products and services in future.14

The charcoal project in Côte d’Ivoire is another promising FAO pilot project. Charcoal remains one of the most important sources of fuel in sub-Saharan Africa, including Côte d’Ivoire. A look through the supply chain highlights the interlinkages with issues of energy, deforestation, employment and other socioeconomic and environmental challenges. The Alpha version of the legal and sustainable charcoal traceability blockchain application was already developed and tested. One of the key findings is that blockchain has the potential to help build traceability systems that are more transparent, efficient and reliable.15

The need for innovative recycling solutions that promote environmental sustainability has never been greater. In Austria, the project Plastic Supply Chain – an innovative approach to offset plastic – aims to investigate the impact of technological and supply chain innovations in the process of plastic bottle supply chains by the shift from a linear to a circular supply chain. The project investigates how a circular supply chain may reduce plastic bottle waste across the relevant processes, i.e. source, transport, storage, make, deliver, revalorization and return. In this project, blockchain technology enables plastic flow visibility and supply chain data quality as well as data security. This innovative approach allows evaluating the impact of the implementation of incentives to obtain higher collection rates, consequently higher recycling rates and increased visibility of the plastic work in process.16

Blockchain also can be deployed in support of the humanitarian supply chain. Humanitarian agencies have to manage complex supply chains over huge distances under highly demanding circumstances. In 2020, the Foreign, Commonwealth and Development Office (FCDO) of the United Kingdom in close coordination with the German company Datarella and other FCDO stakeholders launched a pilot looked to test whether the use of a private blockchain platform could provide immutable proof of supplies passing between actors in the humanitarian supply. The pilot ended with a robust proof of technology that had tracked a live shipment of goods in a controlled environment. The platform was under continuous development to enable scale as well as insight into the “last mile” of humanitarian supply chains using satellite-connected mesh networks to overcome connectivity problems in last-mile humanitarian aid delivery. 17

Source: UNCTAD, based on contributions from the Governments of Austria and the United Kingdom, and from FAO, available at https://unctad.org/meeting/commission-science-and-technology-development-twenty-fourth-session.

14 Contribution from FAO available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_c11_B_FAO_en.pdf. 15 Ibid. 16 Contribution from the Government of Austria available at https://unctad.org/system/files/non-official-document/CSTD_2020- 21_c01_HB_Austria_en.pdf. 17 Contribution from the Government of the United Kingdom available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c34_B_UK_en.pdf. 10 Harnessing rapid technological change for inclusive and sustainable development

III. BLOCKCHAIN’S ECOSYSTEMS OF INNOVATION

Innovation in the blockchain technology is the process 2. Layer 1 software infrastructure of bringing blockchain-based products and services to the market. As discussed in the previous chapters, Another kind of innovation is related to creating a basic blockchain is associated with a broad range of software infrastructure (layer 1) on top of which blockchain innovations, from specific products such as Bitcoin application can be developed. Layer 1 infrastructure to platforms for the development of decentralized broadens the pool of developers by reducing the required applications such as Ethereum. The ecosystem of crypto skills to program in that layer, and also reduces innovation related to blockchain technologies sets the the risk of faulty crypto implementations. Platforms rate and direction of innovation and competence building such as Ethereum and Flow provide a development on the blockchain technology. The central elements in environment of upper-layer applications that benefit the ecosystems of innovation are the main actors in the from what is considered a reliable cryptoalgorithm and innovation process, their interlinkages through which protocol infrastructure (see box 5 for a discussion on the knowledge and resources flow to enable innovation, and the institutions in place that set the rules, regulations Box 5 and expected behaviour associated with blockchain Innovation in Ethereum innovation. Since Ethereum was launched, its development and research have been in continuous progress. By October 2020, Ethereum was developing and planning to implement A. TYPES OF INNOVATION a series of upgrades clustered by the term Ethereum 2.0 (Eth2) improving the scalability and security of Ethereum protocol. A central element in this process is the splitting There are different kinds of innovation related to of the Ethereum network into smaller portions called shard blockchain. Each one of them involves different actors chains. The Eth2, also known as Serenity, is designed to be and interlinkages in the innovation ecosystem. In a launched in three phases: first approximation, these innovations can be divided Phase 0: The so-called beacon chain will be a new blockchain into cryptographic innovations, software infrastructure at the core of Ethereum that will provide consensus to all the (layer 1) and application (layer 2), hardware infrastructure, shard chains. On every shard chain, miners will create blocks of transactions and report them to the beacon chain. This governance and business models (meta-layer), and information will then become available to all the other shards regulations. – maintaining consensus across the whole network. At this stage, the consensus mechanism will transition from proof- of-work to proof-of-stake. Ethereum initial use the proof-of- 1. Cryptographic innovations work protocol relies on miners to keep the network secure by devoting a great amount of computing power to creating new blocks. Instead, the proof-of-stake mechanism keeps At the most basic level, there are innovations related to the network secure but replaces energy consumption with the cryptographic elements of blockchain, including the a financial commitment. The beacon chain is expected to algorithm, blockchain, mathematical models, etc. These be created in 2020; it was still under the testing phase in September 2020. innovations seek to address issues such as increasing security of the solutions, setting different levels of privacy Phase 1: The shard chains will be created to take on a portion and confidentiality, or address performance issues. Many of the processing workload (transactions and account data) of Ethereum. Currently, all nodes in the Ethereum network of these innovations are buried behind obscure and must download, compute, store and read every transaction in complex concepts and are only comprehensible to a the history of Ethereum before processing a new one, which constraints significantly the speed of executing transactions small set of developers with the required cryptographic (15 transactions per second), which is 100 times slower than skills and expertise. These innovations, many times, Visa’s processing speed, around 1,500 transactions per second. have the objective to address flaws that were discovered These updates are expected to be implemented in 2021. in previous implementations. The look and feel of the Phase 2: fully formed shards should be fully functional chains, solution, the way that users interact with it, and the compatible with smart contracts, and they will be able to use case may not change with this kind of innovation. communicate with each other more freely. Developers may be able to design shards in their own ways. This phase is in the They can be classified within process innovations. Other research phase and, according to the plan, it will take place times, these innovations in the cryptographic aspects from 2021 onwards. of solutions open new possibilities to address new use Source: UNCTAD, based on Ethereum 2.0 (Eth2) (2020). cases, generating product innovations. III. Blockchain’s ecosystems of innovation 11

innovation in Ethereum). Moreover, these platforms also to propose and vote on the changes that would be provide ways for the implementation of interoperability implemented in the solution. A related innovation is between application in the platform, which tremendously the DAO (Decentralized Autonomous Organization), increases the value of using the infrastructure. Many which creates the possibility of a completely market- innovations in layer 1 infrastructure are related to the based organization, which has no employers and performance of the protocol. employees whatsoever, but that relies on a decentralized governance mechanism to function as an organization. 3. Layer 2 software infrastructure 6. Innovations in regulations Perhaps the most visible face of the innovation ecosystem is the set of innovations related to the decentralized The current time is the installation period of blockchain applications (layer 2). These can run on top of layer 1 technology, and its innovations are in constant flux. infrastructure such as Ethereum or be implemented This is a period in which there are more ideas and early from scratch. Many of these innovations tend to focus implementations than the number of relevant use cases. on use cases that are a decentralized version of an However, due to the novelty around the technology and its existing centralized application or system – for example, applications, one only finds out if the use case is indeed decentralized currency exchange or trading platform. relevant or not after some resources are committed in the There are numerous use cases that have been mainly initial implementation. Mistakes are made and, hopefully, based on the premise that decentralization is indisputably corrective actions are taken. Therefore, in addition to better than centralization, without any further regard technological corrections, many adjustments are needed about the real value added in creating a decentralized in terms of institutions and regulations. This is another version of an existing and, many times very successful, area of innovation (social innovation) that was brought solution. Many of these decentralized applications have about by technology. These innovations tend to trail the a look and feel of existing centralized applications. technological development and the innovators in this area are also learning what works or not. 4. Hardware B. ECOSYSTEM OF INNOVATION Innovations layer 1 and 2 have also driven innovations in the hardware infrastructure to support these According to the UNCTAD Technology and Innovation applications. For example, the innovation in computers Report 2021, China and the United States of America for mining cryptocurrencies – from the use of graphic lead blockchain research. During the period of cards to the development of specialized computers, 1996–2018, there were 3,390 publications related to there is a considerable level of innovation in the blockchain led by the United States (670), China (622) hardware area of blockchain to strike an economically and the United Kingdom (239). The top three affiliations optimum balance between increasing computer power were Chinese Academy of Sciences (61/China), for boosting the rate of cryptographic operations leading Beijing University of Posts and Telecommunications to successful mining and higher profits, while trying to (43/China) and Beihang University (31/China). During reduce costs through reducing power consumption, the same period, there were 2,975 patents, with the maintenance, and replacement costs. With the top three assignees’ nationality being the United States increasing adoption of cryptocurrencies, one should (1,277), Antigua and Barbuda (300) and China (270). also expect innovations related to gadgets such as The current top owners were nChain (336/United smartphones and smartwatches as well as specific Kingdom), Mastercard (181/United States) and IBM hardware for safely storing these cryptocurrencies. (134/United States). 5. Governance and business models Companies from the United States are the leading blockchain service providers. Top providers of blockchain Another area of innovation in blockchain is related to (blockchain-as-a-service providers)18 service include the governance mechanisms and business models of blockchain solutions. Not only the use of the application 18 Blockchain-as-a-Service (BaaS) is when an external service can become decentralized with blockchain, but also provider sets up all the necessary blockchain technology and the gains from the use of the solution, its development infrastructure for a customer for a fee. By paying for BaaS, and even the governance of its development. One a client pays the BaaS provider to set up and maintain blockchain connected nodes on their behalf. A BaaS pro- innovation that has emerged in this front is the concept vider handles the complex back-end for the client and their of governance tokens that give their holders the ability business. 12 Harnessing rapid technological change for inclusive and sustainable development

Alibaba (China), Amazon, IBM, Microsoft, Oracle and These are well-funded foundations that are to see to SAP (Germany) (Akilo, 2018; Patrizio, 2018; Anwar, the success of their respective open-source software 2019). Top users of blockchain measured by spending ecosystems or support other charity works. on blockchain service were finance, manufacturing and retail sectors (IDC, 2019). Multinational companies operating in traditional sectors have also entered the space with different Despite the lead of the United States and China, the initiatives, such as Nestlé (track and trace) and blockchain ecosystem of innovation is more global than BMW and Maersk (value chain management). By the for other frontier technologies such as AI. Innovations in nature of blockchain solutions, related to their global blockchain have drawn on programmers from developed operations, these companies also contributed to and developing countries, currency exchanges in several making the innovation and deployment of blockchain markets, mining distributed across the world – in places applications more global. with cheap energy resources – and on a user base of retail traders and financial institutions from all over the New NGOs and research institutes specializing in world. The fact that innovation in blockchain has been blockchain technology are being established; an directed mainly to financial and payment solutions, and example is the Blockchain Research Institute,20 an that the financial sector is very global in nature, further independent, global think tank funded by international contributes to the globalization of the ecosystem of corporations and government agencies. This could innovation. become a leading trend in the integration of the technology in NGO works and bring efficiency in the From Governments to enterprises, from research non-profit sector. The Porino Foundation, a non- institutions to start-ups, the blockchain innovation profit based in Switzerland, for instance, through their ecosystem is constantly growing with stakeholders taking Sustainability Chain Project21 deploys blockchain-based initiatives to foster blockchain’s innovation. Most initiatives applications for organizations working to advance the actively involve multiple actors from public research, Sustainable Development Goals. industry and Government, have mixed public–private funding models and seek international cooperation on In academia, an increasing number of universities have the blockchain. box 6 showcases some of the initiatives, designed courses specifically for the study of blockchain both from the public and private sector, extracted by technology. Examples are the University of Nicosia, the contributions received from the Governments of Oxford University, MIT and Cambridge University. In the member States. these courses, various aspects of the technology, ranging from programming to cryptoeconomics and Many of the blockchain initiatives are based on open- blockchain strategy, are taught to industry experts source, free and readily available software for the global and corporate leaders. Several blockchain companies common good with not-for-profit principles at its core. are also collaborating with academic institutions on Many of them are funded by not-for-profit foundations, research and development, as well as product design. many of which are registered in Switzerland. Examples It is expected that at full maturity of the technology, a are the Bitcoin Foundation, Ethereum Foundation, whole new ecosystem will emerge with academics, the Libra Foundation (founded by Facebook) and the advisors, programmers, financial analysts and Blockchain Charity Foundation (founded by Binance). 19 cryptoeconomists at its core.

19 The Blockchain Charity Foundation—through its Block- chain Impact Fund—for instance has partnered with UNDP for social good in developing countries, initially donating US$1 million in 2018. See https://blokt.com/news/binances- blockchain-charity-foundation-partners-with-united-nations- 20 See https://www.blockchainresearchinstitute.org/. development-program-to-use-blockchain-for-social-good. 21 See https://sustainability-chain.com/. III. Blockchain’s ecosystems of innovation 13

Box 6 Examples of the ecosystems of blockchain innovation Austria: The Government of Austria encourages interdisciplinarity in blockchain research and development. The Austrian Federal Ministry of Climate Action, Environment, Energy, Mobility, Innovation and Technology and the Federal Ministry of Digital and Economic Affairs jointly funded the Austrian Blockchain Center, an interdisciplinary research excellence centre with the mission to be the one-stop-shop Austrian Research Centre for Blockchain (and related) technologies to be applied in industrial applications such as Industry 4.0/IoT as well as financial, energy, logistics, Government and administrative applications. The interdisciplinary Research Institute for Cryptoeconomics at the Vienna University of Economics and Business was founded in January 2018 and is member of the Austrian Blockchain Center. This research institute aims to coordinate all blockchain and Web3 related research activities in a multifaceted and interdisciplinary way and to build a competence centre that connects researchers with practitioners.22 Belgium: Blockchain Innovation Center, inaugurated by Fujitsu in 2018 in Belgium, is created under the mission to revolutionize the way consumers and enterprises buy, sell and exchange goods and services and for organizations to transform their commercial and operational models. One area of expertise that the institution plans to develop is the use of blockchain for the design and implementation of Smart City services focusing on important aspects of the city of the future, such as sociological and demographic factors, societal organization, economic functioning and ecological challenges.23 Finland: The blockchain ecosystem of Finland is booming. On 25 May 2018, Helsinki hosted the Blockchain and Bitcoin Conference – the first conference in Finland that is a part of the international series Blockchain and Bitcoin Conference. The event was dedicated to the cryptocurrency trading and investments, the introduction of distributed ledger technology in business, the development of blockchain-based solutions, as well as the global issues of the technology’s influence over society.24 Helsinki also has a Bitcoin Embassy, a non-commercial organization and a platform for Bitcoin initiatives aimed at promoting cryptocurrency among citizens. On a monthly basis, it organizes meetings for cryptocommunity participants, including top Bitcoin holders and entrepreneurs.25 Portugal: An initiative in Portugal named Bee2WasteCrypto, involved multiple actors in making joint efforts to blockchain innovation and research for the management of waste. Bee2WasteCrypto is a project involving a company (Compta), two higher-education schools (Instituto Superior Técnico, NOVA Information Management School), and some of these schools’ research centres. Over the summer of 2020, 12 master and undergraduate students developed new blockchain-based solutions for Regional Waste Management Utilities (RWMU) and behavioural change on the management of waste.26 Russian Federation: The ecosystem of blockchain projects of the Russian Federation is formed by three main groups of players: first, large State institutions of innovative development, such as the Russian Venture Company and its subsidiaries, especially those involved in the National Technological Initiative; second, the Skolkovo Foundation, a scientific and technological centre for the development and commercialization of advanced technologies in the Russian Federation; and, third, major banks including Sberbank, VEB.RF, Alfa-Bank and VTB and corporations such as Rostekh, Gazprom, Rosseti and Russian Railways.27 Turkey: The blockchain innovation environment in Turkey is also very dynamic and collaborative. A platform called Blockchain Turkey was founded in June 2018 by Turkey Informatics Foundation (TBV) and had reached 71 members from more than 10 different industrial sectors as of September 2020. The platform is operating to increase the national potential and public awareness of blockchain technology, to use its valuable benefits and to determine strategic priorities for the ecosystem by providing training, organizing events, producing and publishing relevant content, evaluating the current opportunities and application of blockchain technology.28

Source: UNCTAD, based on contributions from the Governments of Austria, Belgium, Portugal, the Russian Federation and Turkey, available at https://unctad.org/meeting/commission-science-and-technology-development-twenty-fourth-session.

22 Contribution from the Government of Austria available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c01_HB_Austria_en.pdf. 23 Contribution from the Government of Belgium and from: https://www.fujitsu.com/be/microsite/nblockchain/blockchain-innovation- center/ 24 https://finland.bc.events/ 25 https://finland.bc.events/article/digital-modernization-how-finland-builds-blockchain-ecosystem-87686 26 Contribution from the Government of Portugal available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c23_B_Portugal_en.pdf. 27 Contribution from the Government of the Russian Federation available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c25_B_Russia_en.pdf. 28 Contribution from the Government of Turkey available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c33_B_Turkey_en.pdf. 14 Harnessing rapid technological change for inclusive and sustainable development

C. FINANCING BLOCKCHAIN INNOVATION an incentive for potential users to acquire the tokens. Usually, a share of the tokens was distributed to the A particularity in the blockchain ecosystem is the strong development team and initial investors. Some ICOs use of crowdfunding to finance innovations. As defined were able to raise an enormous amount of funds. The by Schumpeter (1939), “capitalism is that form of private increased valuation of the tokens of the most sought- property economy in which innovations are carried after solutions made some of the original development out by means of borrowed money.” In the case of the team and venture capitalist very wealthy. After the bust blockchain ecosystem, innovators are borrowing money of 2017, ICOs were scrutinized by regulators in the from the users of the innovation. Initial Coin Offering United States. Some of the ICOs were considered to (ICOs), as seen mainly in the 2017 bitcoin boom, and breach securities regulations, and their development other innovative forms of distributed finance allow for teams had to pay high fees. fast ways to raise money for blockchain innovation (and for developing bubbles), setting this type of innovation More recently, other forms of decentralized finance have apart from innovation in other technologies that tend emerged. Some have tapped into the high gains in the to rely more heavily on traditional sources of finance value of cryptocurrencies such as bitcoin to use them (e.g. venture capital). to finance the development of new solutions. Thus, the original innovators and investors in previous innovations ICOs were promoted as an equivalent, in the blockchain become the new investors in the new innovations. Many ecosystem, of the traditional IPOs. Through ICOs, the of these innovations have implemented decentralized original team of developers were selling tokens to finance governance mechanisms, as discussed in previous the development of the solution. Those tokens would chapters, and, thus, these new investors also become be required to use the application; thus, there was owners and potential innovators of the new solutions. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 15

IV. THE POTENTIAL IMPACT OF BLOCKCHAIN ON THE ACHIEVEMENT OF THE SUSTAINABLE DEVELOPMENT GOALS

This chapter discusses how blockchain could impact where the greatest challenges for society lie, and who the Sustainable Development Goals. The discussion might be affected. focuses on how current visions that society attributes to blockchain could play out and what could be their It is important to note that all these visions are conditional impact on sustainable development. An interesting to technological changes, but more importantly, to prior example is the Internet. An initial meaning that changes in organizational and social habits, the economy, society placed in Internet technology was that it would social and (in some cases) political institutions. Therefore, create a “global village” that would spread equity, the discussion of the visions of blockchain does not justice, and democracy. These were expectations imply an agreement with these visions, or that they are based on technical characteristics of the Internet correct. It only means that these are some of the ways (cheap, instantaneous, two-way communication). These that society (or parts of the society) see the blockchain expectations did not realize, and the actual use of the and its future impact. What this chapter tries to assess Internet has a direct impact on sustainable development are these visions. What would need to happen for them to (positive and negative). In fact, similar hopes were materialize, who will benefit, what is the potential impact raised by the telegraph, railways, then the telephone. in the environment, what are the societal challenges, what One prediction about radical innovation may be that are the changes required in the current institutions, etc. some of its most important effects in the long term will be felt in areas where it was hardly expected to matter at the beginning (for example, the impact of internal A. EXAMPLES OF BLOCKCHAIN combustion engine on urbanism). Similarly, blockchain APPLICATIONS THAT CONTRIBUTE TO technology is in its infancy, and there many different THE SUSTAINABLE DEVELOPMENT GOALS visions of how the technology is likely to develop, which products will result from this development and As with any technology, blockchain can be applied the potential consequences of their use. in solutions that contribute to the achievement of the Sustainable Development Goals. There are several This chapter is divided into the analysis of forward- examples of such applications, both in the context of looking scenarios and unintended consequences. In developed and developing countries. Table 1 presents terms of scenarios, it discusses existing visions of examples of blockchain-based solutions that contribute the technology, from the more modest to the more to each of the 17 Sustainable Development Goals. Many revolutionary. The chapter discusses what would take of these examples are still in the pilot phase or have for a particular vision to materialize within the time been deployed, but no assessment of actual impact frame of the Sustainable Development Goals (by 2030), is available. 16 Harnessing rapid technological change for inclusive and sustainable development

Table 1 Examples of blockchain applications that contribute to the Sustainable Development Goals

Sustainable Development Digital identity against poverty Goal 1: No poverty In many countries, the poor do not have birth certificates or official identity documentation, (1.4 Equal rights to thus cannot have access to government services and subsidies. In Thailand in 2019, ownership, basic services, the Electronic Transactions Development Agency (ETDA) of the Ministry of Digital Economy technology and economic and Society embarked on the Digital ID Project to develop a nationwide digital identification resources) platform aiming to use blockchain-based timestamping to authenticate and verify the digital identities of Thai citizens.29 Sustainable Development Food voucher transfers with blockchain Goal 2: Zero hunger Blocks for Transport is a supply chain digitization initiative launched by WFP to increase the (2.1 End hunger and efficiency of the food transport between the Port of Djibouti through the Ethiopian supply ensure access by all chain corridor to destination warehouses. This initiative aims to deploy a private blockchain people, in particular, between the supply chain participants from whom authorization is needed. the poor and people in Building Blocks is another voucher delivery platform created by WFP to simplify voucher vulnerable situations) transactions by removing the need to create virtual custodial accounts with financial services providers. It is a large-scale deployment of blockchain and serves approximately 700,000 beneficiaries in two countries in 2020.30 Sustainable Development A modernized information-sharing mechanism in healthcare Goal 3: Good health and The health-care system of Cuba is working in collaboration with the Electronic Technology well-being Software Production Company (SOFTEL) for the management and exchange of medical (3.8 Access to quality information between different institutions in the country using blockchain technology. essential health-care In 2019, with the support of SOFTEL, the hospital Manuel Fajardo implemented digital services) medical records that save the results of laboratories, CT scans, x-rays and other tests performed to patients. This data will be available to any health entity in the country once a centralized medical history is created at the national level.31 Sustainable Development Receive and share official credentials securely and efficiently Goal 4: Quality education Blockcerts is an open standard for issuing, viewing and verifying blockchain-based (4.4 Increase the number credentials for academic and professional certifications, workforce development and civic of people with relevant records. These digital records are registered on a blockchain, cryptographically signed, skills for financial success) tamper-proof and shareable. The Goal is to enable a wave of innovation that gives individuals the capacity to possess and share their own official records. The initial design was based on prototypes developed at the MIT Media Lab and by Learning Machine, now Hyland Credentials. For ongoing development, this open-source project actively encourages other collaborators to get involved (Blockcerts, 2020). Sustainable Development Financial independence for women’s empowerment Goal 5: Gender equality VipiCash, a winner at the first “blockchain hackathon” coorganized by UN-Women and (5.1 End discrimination Innovation Norway in 2017, is an application that uses blockchain technology to enable against all women and secure money transfer among women so that they can have access and control over girls) their own money, independent of the male members of their family. The founder, a social innovator who grew up in a refugee camp, is working to create blockchain solutions to help empower women in humanitarian crisis situations (UN-Women, 2018). Sustainable Development Transparent and reliable water trading system Goal 6: Water and In Australia, Arup, a multinational firm, is working with the government of the State sanitation for all of New South Wales to build a proof-of-concept that uses blockchain technology to (6.4 Increase water use improve the water trading system, so it is fairer, as well as more reliable, transparent efficiency and ensure and efficient to manage (Arup, 2018). fresh water supplies)

29 Contribution from the Government of Thailand available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c30_B_Thailand_en.pdf. 30 Contribution from WFP available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_c41_B_WFP_en.pdf. 31 Contribution from the Government of Cuba available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c04_HB_Cuba_es.pdf. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 17

Sustainable Development Blockchain-based solution for energy efficiency improvement Goal 7: Affordable and clean energy In the Russian Federation, the power company Rosseti together with Waves Enterprise and Alfa-Bank have implemented a pilot project called “Energy Accounting Using (7.3 Double the Blockchain Technology” to increase energy efficiency through blockchain use for electric improvement in energy power metering. The project ensures transparency of the system of interactions and data efficiency) exchange between electricity companies, as well as consumers of electricity.32

Sustainable Development Access to interest-free loans using blockchain Goal 8: Decent Work and Economic Growth In April 2020, the Federal Tax Service (FTS) of the Russian Federation launched a blockchain platform named “MasterChain” to issue interest-free loans to SMEs. (8.10 Universal access to The platform has been designed to rapidly process business owners’ applications for banking, insurance and interest-free loans fo the payment of wages. It transfers digital values and information financial services) about them between participants and includes several services.33

Sustainable Development Blockchain-based cash register Goal 9: Industry, innovation and Latvia encourages e-government in all domains of Government and has also explored the infrastructure use of blockchain systems in the public sector and government-provided services. A pilot project in Latvia involves the implementation of the cash register reform that would (9.1: Develop sustainable, strengthen the supervisory capacity of the State Revenue Service (VID) by reducing resilient and inclusive unregistered cash flow and provide a proportionate financial and administrative burden infrastructure) for businesses to ensure compliance with the requirements set for them, thus reducing shadow economy. Blockchain-based cash register solution is also expected to ensure environmental sustainability by reducing paper use.34

Sustainable Development Improve schools’ Internet connectivity around the world Goal 10: Reduced inequalities The UNICEF Project Connect is a blockchain-based platform that aims to map every school in the world and their connectivity to help people understand what regions are lacking basic (10.3 Ensure equal connectivity, then eliminate the digital divide, increasing opportunity for every community. opportunity) The Goal is to provide real-time data assessing the quality of each school’s Internet connectivity, eventually creating an observable metric of society’s progress towards enabling access to information and opportunity for every community.35

Sustainable Development Blockchain makes cities inclusive, safe, resilient and sustainable Goal 11: Sustainable cities and communities The State Railway of Thailand uses blockchain in the development of a dedicated communications system to increase the accuracy of its railway itinerary and to enhance (11.2 Affordable and the security of high-value parcels shipped through its logistics network. The projects of sustainable transport transportation and logistics ultimate goals are to deploy the blockchain technology to make systems) cities inclusive, safe, resilient, and sustainable where opportunities are provided for all, with access to basic services transportation and all of that in a sustainable way.36

Sustainable Development Blockchain-based seafood traceability and quality control Goal 12: Responsible consumption and Bitcliq, a technological SME, developed a blockchain-based e-marketplace for seafood production trading. This platform, named Lota Digital, allows fishers to register and post a sale for fishes and seafood on the platform. It provides a quality control service in the auction (12.2 Sustainable process and controls the trade agreements between the buyer and the seller with the use management and use of of blockchain.37 natural resources)

32 Contribution from the Government of the Russian Federation available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c25_B_Russia_en.pdf. 33 Ibid. 34 Contribution from the Government of Latvia available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c21_B_Latvia_en.pdf. 35 https://www.projectconnect.world 36 Contribution from the Government of Thailand available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c30_B_Thailand_en.pdf. 37 Contribution from the Government of Portugal available at https://unctad.org/system/files/non-official-document/CSTD_2020- 21_c23_B_Portugal_en.pdf. 18 Harnessing rapid technological change for inclusive and sustainable development

Sustainable Development Low carbon tea project in Kenya (GLI-TEA) Goal 13: Climate action The project activities include a feasibility study and pilot testing on blockchain technology (13.3: Build knowledge for the Kenyan tea sector. The use of blockchain supports the traceability and transparency and capacity to meet of both production and emissions of the tea value chain. While increasing the trust among climate change) consumers and retailers, tea promoted as a “carbon sink” could give growers potential access to carbon markets, bringing forward economic incentives for small-scale tea producers.38

Sustainable Development Rewards for protecting biodiversity in Australia Goal 14: Below water The Commonwealth Bank of Australia, in partnership with BioDiversity Solutions (14.2 Protect and restore Australia, has developed a prototype platform to facilitate the protection of environmental ecosystems) ecosystems, while also creating an alternative source of income for landowners and rewarding them for preserving biodiversity on their land and marine resources.The platform enables the creation of tradeable digital tokens named BioTokens, representing biodiversity credits for the Biodiversity Offsets Scheme of the government of New South Wales, within an efficient blockchain-enabled marketplace (Commbank, 2019).

Sustainable Development Incentive wildlife conservation in Namibia Goal 15: Life on land Wildlife Credits is a wildlife conservation incentive payment scheme developed and piloted (15.7 Eliminate poaching by Namibian community-based natural resource management (CBNRM) organizations. and trafficking of They offer conservancies direct payments for wildlife sightings on their territory and for protected species) maintaining habitat, mainly in the form of migration corridors. In locations where the rule of law is not upheld, and the banking infrastructure is poor, payments for ecosystem services (PES) schemes can corrupt, and the payments sometimes fail to reach the addressees. This solution tackles these issues (Oberhauser, 2019; Wildlife Credits, 2020).

Sustainable Development Transparency in transactions and immutability of asset registration Goal 16: Peace, justice and strong institutions The Bank of Thailand adopted blockchain technology to minimize interbank settlement fees, and 22 banks in Thailand have come together to formalize the Thailand Blockchain (16.9 Provide universal Community Initiative which will streamline letters of guarantee via a shared trade finance legal identity) platform. Blockchain enables transparency in transactions and the immutability of asset registration. Transparency ensures that commerce and trade documents, as well as other relevant data, are accessible to the public and available for criticism for better strategy- making in corporations and Governments to optimize trade and ensure standardization.39

Sustainable Development Blockchain platform to coordinate and trace international aid Goal 17: Partnerships for the goals United Kingdom Aid, in collaboration with the fintech startup Disberse, launched a pilot to test whether using blockchain could solve problems of transparency, speed, efficiency (17.3: Mobilize financial and mismanagement of aid funding across the financial supply chain. Financial flows from resources for developing donors represent huge sums of money but form complex networks of dependencies that countries) are hard to understand at each level. Such a traceability problem means that not enough is known about the complete system to be able to analyse its effectiveness. A blockchain- enabled platform is used to coordinate and trace international aid transactions using smart contracts, combined with a virtual money account that is linked to a registered banking provider. Together, this solution can improve the overall speed, cost, and transparency of funds across the financial supply chain.40

Source: UNCTAD, based on contributions from the Governments of Cuba, Thailand, the United Kingdom and from WFP, available at https://unctad.org/meeting/commission-science-and-technology-development-twenty-fourth-session.

38 Contribution from FAO available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_c11_B_FAO_en.pdf. 39 Contribution from the Government of Thailand available at https://unctad.org/system/files/non-official-document/CSTD_2020- 21_c30_B_Thailand_en.pdf. 40 Contribution from the Government of the United Kingdom available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c34_B_UK_en.pdf. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 19

B. FORWARD-LOOKING SCENARIOS unaware) of the underlying technology used to power the applications that they use. 1. Decentralized applications overtake centralized ones Therefore, on the social side, it would require a shift in the perception of the potential risk of using centralized Some people see blockchain only as a tool for creating applications for the demand for these applications to decentralized applications that could efficiently replace truly grow organically. In the absence of that, the push existing centralized ones (those based on centralized for decentralized applications will have to continue to databases) or allow for the creation of new applications be supply-driven – by the developers and promoters that require decentralization. This development could of the technology. The consequence of that pattern is facilitate innovation for the Sustainable Development that it is less likely that blockchain innovation would Goals if blockchain could create solutions that otherwise incorporate the user’s views in the development of would not exist by not being technically, economically applications, which could make these solutions less or socially feasible as a centralized application. effective in addressing relevant problems and challenges faced by users. This vision of the technology and its use is the basic extrapolation of the most evident characteristic of the The blockchain technology has also to improve on the technology: its decentralized nature. However, it is performance front to match the current performance of centralized applications. At this moment, it is not clear important to note that blockchain is not the only way to if that would be achieved soon. Current applications create decentralized applications. In fact, decentralized in finance, online payment and management of value use of solutions is a common feature of the applications chains are usually based on use cases that focus on on the Internet. They are used in platforms such as properties such as freedom from central control and Facebook and Airbnb. These applications, despite the transparency, not on performance in terms of the decentralized use, still require centralized control of the number of transactions per unit of time. Perhaps more data, and this is what the blockchain technology can concerning, the use of proof-of-work in the blockchain decentralize. But when is decentralization a relevant as the consensus mechanism is extremely energy feature of the application? The question, indeed, inefficient, as discussed later in this chapter. The more boils down to when to use a central database or a applications that use the proof-of-work, the larger that decentralized ledger. problem will become, and the higher the probability that people will start to notice and reject to use a technology There are several heuristics proposed to guide the that puts the climate or the planet in danger. A clash development of blockchain applications and select between two strong calls by civil society may be seen: between a traditional database and a DLT (United the environmental call for action to address climate Nations Innovation Network, 2019). In these guidelines, change and the call for freedom from central controls usually, the decision for central databases is the most in the digital world. The latter seems to have the upper straightforward one. They recognize that most of the hand, currently. applications could be implemented with centralized databases, and only when the risk of centralized solutions If indeed decentralized applications overtake the current is considered too high by the users, is a blockchain landscape of centralized ones, what would be the impact solution proposed. on the Sustainable Development Goals? A first one was already mentioned above; if the current proof-of-work In the original use case of the technology, the bitcoin, this mechanism is the way that most of the applications use risk was the power of a central actor to shut down the to reach consensus (as currently is the case), then a world whole system or change the ledger and move away with using blockchain technology replacing centralized ones other people’s money. Given the financial implications, would have a severe negative impact of the environment, the solution justified the use of a DLT. However, this case and thus the Sustainable Development Goals. is weaker for a considerable number of applications that people seems to be comfortably using today. In The positive impacts are less clear. There is an expectation fact, users of most social networks are willing to trade of reduced costs of use of solutions that use blockchain, their right for data privacy in return for the benefits of due to potential reduction on transaction costs. However, being part of the network. As long as the application there is nothing in the technology that intrinsically requires works, users tend to be indifferent (and in fact, totally transaction costs to be low. In fact, the so-called “gas” 20 Harnessing rapid technological change for inclusive and sustainable development

in Ethereum platform, which could be considered as blockchain would allow the poor to have access to retail the tax that users must pay for miners to register their banking services. This could be, for example, creating transactions in the blockchain, has reached incredibly blockchain versions of MPesa or digital microcredit higher levels in August and September 2020. At that services, but with lower fees. The argument is that by time, some users were paying $11 per transaction in gas not requiring a central authority to control or enable the fees (Toti, 2020). In the end, it is not clear if blockchain transactions, which would need to be remunerated for applications would be systematically more affordable for that service, there would be savings to be made for users than the centralized ones that they may replace. the users of blockchain-based financial applications. The use of blockchain would also make services like What about the claim that the technology may enable new MPesa and microcredit services more secure in certain decentralized solutions for the Sustainable Development aspects and more private (decentralized nature of the Goals, that otherwise could not be implemented using blockchain). Therefore, as a tool for financial inclusion, centralized databases? This seems to be a weaker applications using blockchain could complement the claim because arguably the roadblocks for implementing services provided by retail banks. technological solutions for the Sustainable Development Goals are usually not in the technologies themselves As countries look to implement the blockchain but on the access to these technologies, including technology to advance financial inclusion, the prospects availability, affordability, awareness, accessibility and of digital currency versus cryptocurrencies must be ability to use. The fact is that the people that would evaluated. Digital money has brought financial services benefit the most, those that are furthest behind in the to millions of people who previously did not have access Sustainable Development Goals, are also those that to traditional banking. The technology uses the ubiquity have less access to technological solutions. Inequality in of mobile phones to bring easy and fast digital cash terms of benefiting from technology reflects the existing transactions to new users. Whereas traditional banking inequalities in society, and can further exacerbate them has high barriers to entry and limited services outside of (UNCTAD, 2020). It is conceivable that blockchain could urban areas, digital money only requires SIM cards and be used in Sustainable Development Goal applications basic identification to register new users. Blockchain for which alternative centralized solutions are not technology has also seen similarly fast adoption in viable due to the lack of trust of potential users in the places where traditional banking cannot meet the motives, effectiveness, and reliability of the central (or needs of users. There are relative advantages to each incumbent) operator. However, that may also reflect system, and there is scope for both technologies to deeper inequalities in power relations which could be operate in tandem. difficult to address based only on technological solutions. Digital money such as MPesa in Kenya has the advantage If despite these weak prospects, blockchain technologies of being cheap and easy to use, operated with accessible replace centralized ones in technology solutions for the mobile apps and a distributed network of agents that Sustainable Development Goals, that would not trigger manage the cash to digital money exchange. Currently, the need for much change in the institutions that are cryptocurrencies have a higher technological barrier to in place to promote the use of ICT for development. entry. Easily operable and user-friendly applications are A push would still be required for universal access to yet not readily available. Cryptocurrencies also require the Internet and for the mobile devices that allow the higher digital literacy to operate than mobile banking, use of the applications. Similarly, Governments should and consensus-based algorithms take longer to verify continue to push for increasing the digital skills of the a transaction than mobile banking transfers. Currently, population. Laws and regulations related to data privacy for everyday usage, mobile banking is easier to use than and security would continue to be critically required. cryptocurrencies for domestic transactions.

2. Applications are developed for financial The fast adoption of digital money is not a deterrent to inclusion the adoption and use of cryptocurrencies. Each system has its strengths and can be used complementarily to Some people see blockchain as a tool that would serve different needs. As cryptocurrencies become allow people to have access to financial services at low more user-friendly, and if they succeed in becoming costs; banking those that are connected but are also less resource-intensive (e.g. computing power, energy), un-banked. The idea is that the potential for reduction in the current users of digital money may become the transaction fees through the decentralized nature of the cryptousers of the near future. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 21

However, it is important to note that cryptocurrencies If, through the efforts of governments and other that are more suitable for financial inclusion are those stakeholders, the private sector develops blockchain that maintain relative price stability, the so-called stable innovations for financial inclusion, what would be the coins. If the price of the cryptocurrency is volatile, such impact on the Sustainable Development Goals? As as in the case of Bitcoin, it becomes less useful as a per the discussion above related to digital money mean of exchange. Mobile money such as in the MPesa and cryptocurrencies, the expectation could be that is usually pegged to the national fiat currency. To become blockchain applications could complement other digital an alternative to mobile money, cryptocurrencies should versions of inclusive financial applications. However, it have similar mechanisms. is not clear how much it would add beyond what the latter already offer. Interestingly, one of the initial visions for Bitcoin was to facilitate financial inclusion. However, its high volatility An exception is in the case of people in countries and deflationary tendency, in which the expectation of undergoing macroeconomic distress such as hyperin- holders of Bitcoin is that it will increase in value over flation. In that case, the decentralized nature of some time in comparison with any basket of products, makes blockchain applications would make these a safer Bitcoin ill-suited for day-to-day low-value transactions, as option for people to store and manage their money. it is further discussed later in section IV.B.4. In addition, its This situation is also discussed below in section IV.B.4. speculative appeal as a crypto version of gold (holder of value) has tilted the ownership of Bitcoin towards wealthy 3. Efficiency increases in international digital investors, in a pattern that is the opposite to what would transactions be expected from a tool for financial inclusion. Given that Bitcoin is the most successful cryptocurrency, it remains Some people consider that blockchain’s main role is for to be seen the emergence of cryptocurrencies that could increasing efficiency in digital transactions internationally. make substantial contributions to more inclusive finance. It would complement or replace interbanking and digital payment mechanisms. It could reduce the costs of The whole area of decentralized finance (DeFi) could remittances and payment transactions in supply chains also contribute to financial inclusion, with the creation and increase e-commerce. of decentralized versions of microfinance and other As they can be exchanged without banks, cryptocurrencies inclusive financial mechanisms. Currently, as mentioned do not impose the same transaction fees as digital in previous chapter, DeFi is going through a period currencies when exchanged cross-nationally. Sending of fast innovation. Most DeFi applications are related remittances through traditional channels can often to currency exchanges and yield farms – platforms be expensive. Remittance costs averaged 7 per cent that enable people to lend cryptocurrency in return for globally in the first quarter of 2019, and costs can be interests and fees. The users are, in their majority, people as high as 10 per cent in many African and Pacific with an above-average understanding of blockchain island countries.41 Regulation and lack of competition and finance. Many are developers themselves or DeFi are the usual culprits of high remittances fees. Often, “experts”. Therefore, DeFi innovation ecosystem is these transaction costs are flat fees which burden low- not targeting the development of applications for the income workers more. In these cases, digital money unbanked. Inclusiveness is not one of the drivers of such as MPesa may not be an option, given that such innovation in this domain. money is usually valid only for exchange with the local fiat currency. If cryptocurrencies become better trusted For the vision of blockchain technology as a tool for through standardization and regulation, they may reduce financial inclusion to materialize, there must be a push both transaction time and costs for remittances and for inclusive financial innovations. It is unlikely that the lead traditional channels to provide competitive prices. private sector will drive this process because it tends to focus first on solutions for wealthier users, who can Many firms in low- and lower-income developing countries pay the further development and deployment of the do not engage in international trade due to the lack of applications. Therefore, Governments, civil society “hard” currencies (such as United States dollars) to carry organizations and international organizations would need out international transactions, which is a result of the to steer the incentives for innovation towards inclusive lack of a diversified economy and exportable products. finance and away from financial innovations that focus on making profits out of speculation and the valorization 41 See https://www.worldbank.org/en/news/press-release/ of cryptoassets, in a casino economy. 2019/04/08/record-high-remittances-sent-globally-in-2018. 22 Harnessing rapid technological change for inclusive and sustainable development

In countries with balance of payments difficulties (e.g. drop in manifestations. It has three primary economic functions: exports, high import dependency, declining capital inflows, medium of exchange, store of value, and unit of account rising foreign debt and sustained currency overvaluation), (Jevons, 1876). How well cryptocurrencies could serve Governments are forced to control the purchase of foreign those three functions would determine cryptocurrencies’ exchanges and prioritize some sectors considered of prospects for replacing fiat money. national interest. Firms in other sectors would not have the required foreign currency to buy imports (e.g. capital One measure of the extent to which a currency is goods and intermediary goods) that may be required for being used as a medium of exchange is the number them to engage in exports. of transactions performed in that currency. As noted above (see chapter I, section B.1), both in terms of The use of payment applications using blockchain performed transactions and the number of users, at could provide an alternative to firms to circumvent present, cryptocurrencies are far from challenging these restrictions. However, at the end of the day, the dominant usage of sovereign currencies and such application would only work against the goals of no Government accepts them as a legal tender. public policy; for example, to prioritize firms in some Another indicative measure of cryptocurrencies’ strategic sectors in the access to foreign currency to worth as a medium of exchange is the acceptance of promote social goals, such as the creation of higher- cryptocurrencies as a means of payment. Currently, wage jobs or economic diversification and structural there are a limited number of merchants worldwide transformation. (predominantly, but not exclusively, Internet-based vendors) that accept cryptocurrencies as a means Firms would still need to exchange cryptocurrencies of payment. Some examples are Microsoft, which to the local fiat currency to be able to pay workers, accepts Bitcoin for use in its online Xbox Store since suppliers, and taxes, but if there is a decentralized 2014; Overstock, an online shop with furniture and marketplace for the exchange of cryptocurrency and home appliances, which accepts not only Bitcoin but fiat currency, that exchange could be done. However, also multiple other altcoins; Whole Foods, an Amazon- there is always the possibility of the government to owned food retailer; Expedia, an online travel booking regulate the use of cryptocurrencies and restrict the agency; Newegg, an online shop with electronics; exchange to local fiat currencies. Shopify, an e-commerce platform; and Coincards, which is a platform that exchange cryptocurrencies If indeed blockchain is used for international payment for gift cards that can be spent at retailers such as and digital transactions, what would be the impact on Apple, Amazon, Adidas, Walmart and Uber (Tuwiner, the Sustainable Development Goals? Increasing trade 2020). Thus, some cryptocurrencies are serving as a and transport efficiency and reducing costs has the medium of exchange, although their acceptance is potential to increase trade. Who benefits from that currently limited. increase still depends on many other factors such as the productive structure of countries and the policies in place to harness trade for development. If most people Another property of money is the store of value. in a low-income developing country continues to live out How good a fiat currency (such as cryptocurrency) of subsistence agriculture, few cash crops and low-wage is in storing value depends on the monetary policy low-technology manufacturing, then increasing trade associated with that currency. If too much of it is does not change the structure of their economy, and created (faster than the average productivity increase any gain is likely to be passed to foreign clients as lower of sectors of the economy), the cryptocurrency will be prices. The challenges for developing countries to fairly inflationary. Over time, more of it will be required to buy integrate into and benefit from globalization would remain the same basket of products. The cryptocurrency will in a future in which blockchain is the main technology fail in the criteria of a store of value. If, on the other used for international digital transactions. Therefore, the hand, too little of the currency is created, as compared impact of blockchain on sustainable development under with the average productivity increase in the economy, this scenario, should not be expected to be significant. then the cryptocurrency will be deflationary. Less of it will be needed overtime to purchase the same basket 4. Cryptocurrency replaces fiat money of products. The cryptocurrency will be a good store (and increase) of value, but people will prefer not to This is the vision that blockchain cryptocurrencies use it for day-to-day transactions as it will have much could complement or replace fiat currencies. Money more value in the future. Therefore, the currency may has been in existence throughout history in different fail in the criteria of being a good medium of exchange. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 23

Taking Bitcoin as an illustrative example, it seems a mined, the reward was halved to 25 bitcoins; on 9 July very good store of value, but ill-suited as a medium of 2016, after another 210,000 blocks were mined, the exchange. On 22 May 2010, the first real-world transaction reward halved to 12.5 bitcoins per block; and once was recorded in which Bitcoin served the function of a again, on 11 May 2020, the reward was halved to medium of exchange, at a rate of US$0.0025 by buying 6.25 bitcoins. The reward is programmed to halve until two pizzas in Florida (United States) for 10,000 BTC the incremental addition of coins disappears around (CoinDesk, 2014). Those two pizzas cost the equivalent the year 2140 peaking at the supply limit of 21 million to over US$100,000,000 by the exchange rate between Bitcoins.43 Figure 4 shows the actual supply growth Bitcoin and the United States dollar in October 2020. of Bitcoins and its growth rate. Actual numbers are shown for the years 2009–2020, while projections An asset’s worth as a store of value rests on people’s are used for all other years (Bank of England, 2014). beliefs regarding its future supply and demand (Bank of England, 2014). In the case of cryptocurrencies, this While the supply growth is fixed and predictable, is partly determined by the algorithm that implements prospects for future demand, which is essentially the cryptocurrency in the blockchain and partly by market-determined, are far less certain. As the expectations that people have related to that cryptocurrencies lack any intrinsic demand (for use currency. Taking Bitcoin again as an example, in the in the production or consumption) and any form supply side, a new block in Bitcoin blockchain is created of central authority, an opinion about their future every 10 minutes. By solving the cryptographic puzzle demand should largely rest on (a) a belief about their associated with the creation of a new block, the miner future use as media of exchange and (b) a belief that is rewarded with newly issued Bitcoins – the amount they will continue to remain in demand even further of the reward halves every 210,000 blocks, or roughly into the future (Bank of England, 2014). The market every four years. For the first 210,000 blocks, the reward value of cryptocurrencies will rise sharply when associated with each block was 50 bitcoins. Starting on their adoption increases, while large liquidations of 28 November 2012, after the first 210,000 blocks were holdings will cause the price to plummet.

Figure 4 Bitcoin: Money supply and inflation

Percentage

illin nited tate dllar

Ttal T ul nnual rth ate

Source: UNCTAD, based on data retrieved from coinmetrics.42

42 See https://coinmetrics.io. 43 See https://bitcoin.org. 24 Harnessing rapid technological change for inclusive and sustainable development

Figure 5 Price volatility of bitcoin

nited tate dllar

ul ul ul ct ct ct r r a a a an an e un un ec ec ug ec ec ug ar ar ar ar ct et et

Source: UNCTAD, based on data from coinmarketcap.44

At present, all cryptocurrencies are characterized of Argentina announced on 15 September 2020 a 35 per by unstable market values expressed in sovereign cent tax on purchases with cards (debit and credit) in currencies (mostly in United States dollars). For example, foreign currency (mainly United States dollars), trading figure 5 displays the historical price evolution of Bitcoin, volume for the DAI-ARS pair (that is, people trading DAI for and Table 2 shows the annual rate of return for Bitcoin Argentine pesos) has increased substantially and reached 46 in the period 2011–2019. Although these statistics record levels (BCRA, 2020; Jose and Lanz, 2020). drive interest in the analysis of cryptocurrencies as Table 2 investments, they reveal the extremely volatile price Rate of annual return of bitcoin and annual return that make Bitcoin unusable as a long-term unit of account for goods and services. Annual return Year Opening price Closing price Moreover, this value instability could also be considered (Percentage) the key factor of their failure to perform the store of 2011 0.3 4.72 1 473 value function. 2012 4.72 13.51 186

The function of the store of value is interrelated with 2013 13.51 758 5 511 the unit of account function; the property of stability 2014 758 320 -58 of money is the link. Money can only be predictably usable as a store of value when it is stable enough 2015 320 430 34 to be reliably saved, stored and retrieved. In order to 2016 430 968 125 satisfy the unit of account function, the value of the money should also be stable over time; sudden and 2017 968 13 860 1 332 frequent fluctuations of money value diminish the 2018 13 860 3 742 -73 possibility of its usage significantly as a unit of account (Graham, 1940). 2019 3 742 7 193 92

Source: UNCTAD, based on data retrieved from coinmetrics.47 However, even if a cryptocurrency is only good as a store of value, people could still find good use of it as Thus, what is the viability of this vision of a hedge against high inflation. For example, individuals cryptocurrencies replacing fiat money? Firstly, the and organizations have used cryptocurrencies in adoption of cryptocurrencies would have to increase response to national currencies experiencing rapid many folds. For example, although the current market inflation, such as in the Bolivarian Republic of Venezuela value of Bitcoin, as a representative cryptocurrency, is in 2019.45 In another example, when the Government already very significant in absolute terms, it is lower at

44 See https://coinmarketcap.com/currencies/bitcoin/. 46 DAI is a stablecoin of the MakerDAO lending system. Available 45 See https://www.rollcall.com/2019/09/10/venezuelans-use- at https://makerdao.com/en/. cryptocurrency-to-bypass-corruption-inflation/. 47 See https://coinmetrics.io. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 25

Figure 6 Comparison between Bitcoin and other assets on the global market

Bitcoin market cap

Global tangible currencies

Global gold reserve

Global stocks value

Global money supply trillon USD Source: UNCTAD, based on data from Desjardins (2020).

the aggregate level in comparison with other assets on be the impact of that change for the Sustainable the global market (figure 6). It represents 3.03 per cent Development Goals? The impact would be felt through of the world’s total tangible currencies, namely, coins the effect on monetary policy. Cryptocurrencies rep- and banknotes in circulation (US$6.6 trillion), 1.83 per resent a form of private money, that is, they are not cent of world’s gold reserve (US$10.9 trillion), 0.22 per issued and controlled by central banks, but rather cent of the world stocks value (US$89.5 trillion), 0.2 per by private entities. cent of the global money supply (US$95.7 trillion) (Desjardins, 2020). The idea of coexistence of sovereign-backed and pri- vately issued money is not recent. For example, in Moreover, the adoption of cryptocurrency as money for the 1970s, during a period of high inflation in western trade activities has not yet happened. Most Bitcoin buyers economies, the idea of free banking and private money just hold on their bitcoins for speculative purposes. The was proposed by Friedrich Hayek. He was sceptical fact that Bitcoin is not pegged to any currency exposes about a Government’s monopoly on monetary policy bitcoin holders to currency exchange risks. Stable coins and advocated abolishing the State’s monopoly on do not offer a satisfactory alternative either because of issuing and regulating money and creating competi- the regulatory constraints to use them for trading and tive supranational currencies as a way to ensure the purchasing activities. stability of the official currency. He argued that it “… has certainly not helped to give us a better money than Based on these figures and examples, it could we would otherwise have had, and a very much worse be concluded that, at the current stage of usage, one…” (Hayek, 1976). cryptocurrencies have a negligible impact on the money supply and do not have the capacity to challenge the However, any discretionary decisions made by private dominant position of sovereign currencies and central entities concerning the money supply could have banks. Nevertheless, the influence of cryptocurrencies an impact on the ability of central banks to conduct on sovereign currencies in the future cannot be predicted monetary policies such as the management of money simply based on the current data because of fast progress supply and interest rates. Stablecoin with worldwide in the area of information technologies, which hereafter expansion expose small and economically weak States might increase the chances for cryptocurrencies to to a risk of substitution to their national currencies. compete with sovereign currencies effectively. Several hurdles need to be lifted before regulators If cryptocurrencies indeed have a widespread adop- would consider authorizing a cryptocurrency to be tion allowing them to replace fiat money, what would used for economic transactions similar to those in a 26 Harnessing rapid technological change for inclusive and sustainable development

sovereign currency. One example is Libra, a project of markets that do not require a trusted third-party actor Facebook for a global stable coin, backed by 28 major to design and enforce rules). However, others argue companies, among which are Visa, Master Card, Pay that with blockchain, trust is just shifted from one third Pal and eBay, with a potential client base of 2 billion party to another. For example, to use a cryptowallet, people (the users of Facebook). None of the Group of people must trust that the application works properly 7 countries authorized its use, and it has still not been and does not have bugs or a malicious piece of code officially launched despite its announcement in June that will steal their cryptocurrencies. People also must 2019. Regulators asked Libra to demonstrate that it trust the proper functioning of cryptoexchanges to be protects the privacy of its users and that it can comply confident to use them. Similarly, people must trust the with anti-money-laundering regulations. The potential people that code blockchain applications and smart abuse of dominant position, as well as systemic financial contracts. Such trust is ensured outside of a blockchain, risks in case any failure were to occur in the management through reputation, auditing of the code and smart of Libra and or its reserves are also put forward as contracts, and so on. concerns to be addressed before authorizing Libra (or any stablecoin). Another way to view Blockchain as the new Internet is to consider it is part of the set of technologies The momentum for a digital currency has now been (others being AI, robots, IoT etc.) that is behind of initiated, and Central Banks have realized the need to the new sociotechnical revolution called Industry develop their own digital currency should they want to 4.0. The impact of such technological–economic avoid the private sector to get full control over digital revolutions goes beyond the economy; they change currencies. China has been the first to initiate the race social relations, institutions, settlement patterns, the to Central Bank Digital Currency (CBDC). Pilot projects relationship with the environment and so on. These have started in some limited cities. changes are truly transformative and affect the options open for countries to pursue sustainable development. The European Central Bank (ECB) is also looking into launching its own digitized euro to complement the Based on that assumption, blockchain (as many of existing means of payment within the Eurozone but also those frontier technologies listed above) is in the to provide an alternative to private digital currencies.48 installation period of a sociotechnical revolution. The Although DeFi has not been developed yet in CBDC, installation period is dominated by radical innovations it took less than two years for its development on led by suppliers, experimentation and new technological the Bitcoin and Ethereum platforms. It remains to be solutions, many standards and competing technical seen what the settings of the Chinese and European specifications. After the installation period, there is CBDCs will be, and who will be able to access these the deployment period in which the emphasis is on digital currencies and what will be the regulations to the exploitation of the technical solutions, changes develop financial services and applications on these in demand and lifestyles. platforms. It is critical to understand the interrelation between the 5. Blockchain becomes the “new Internet” real economy and the financial sector throughout the life cycle of the technological–economic paradigm. This vision of blockchain considers that blockchain is During the installation period, the financial sector, which a general-purpose technology (GPT) at the scale and provides the required finance for entrepreneurs to carry scope comparable to the Internet. Blockchain would out innovations, is also learning about the new technology become the “Internet of value”. and the opportunities that it creates for financial gains. This period is also usually characterized by considerable Some of those that subscribe to this vision consider that liquidity in the financial markets, due to high profits in it automatizes trust, and thus can serve as a universal the sectors associated to the previous technological– “trust machine”. Blockchain technology would then economic paradigm, which in the present is the Web revolutionize the way that firms operate (reducing 2.0 and the high profits of the main digital platforms (e.g. transaction costs within the firm and enabling market Facebook, Google etc.). The fast pace of innovation and solutions) and the way that markets function (creating insufficient knowledge about their real potential tends to create a frenzy of investment in the new technology. 48 Christine Lagarde, President of the ECB at the opening ses- As a result, there is a tendency for speculation and the sion of the French–German parliament, 22 September 2020. emergency of “money creating money” schemes with the IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 27

gradual decoupling of the real economy and the financial mechanisms. The current rapid pace of innovation on sector. The social–institutional basis of the economy DeFi could mark the new irruption phase, which could be (e.g. regulations, laws etc.) have not yet caught with followed by a new frenzy and a potential bubble on DeFi. the pace of innovations in the technolocial–economic sphere. There are no breaks for dealing with the casino The fact that blockchain innovations include self-financing economy driven by the financial sector. The end of the mechanisms allows for fast growth of financing the installation period is prone to financial bubbles and, “next big thing” in the technology. The success of the thus, the installation and deployment period tend to be early innovations fuels the search for additional ones separated by financial crises. Such crises could lead to in the same area, in this case, DeFi. Invariably, later an alignment of institutions with the new technological– case uses may become weaker and riskier, trying to economic paradigm and recoupling of the financial sector stretch the technology and innovations to solve ever with the real economy. The deployment period is then more obscure and less intuitive “problems”. Speculation usually a “golden age” of innovations that percolate and search of fast gains attract investors that are less from the core sectors of the new technology to other familiar with the real potential of the technology, which sectors of the economy (Perez, 2002). is a receipt for a frenzy. The potential recurrent boom and bust of blockchain innovations could bring changes The way that blockchain innovation is self-financed in the regulations and other institutions needed to align could expedite this process and may create a series of finance and production capital (figure 7). However, that periods of installation, crisis and deployment, particular does not prevent the possibility that it could hurt many to blockchain innovation. For example, one could say investors along the way. that from 2008 to 2017, there was a period of installation of blockchain technology focusing on cryptocurrencies If those affected are mainly the innovators and (particularly bitcoin). There was a period of irruption and venture capitalists in the blockchain ecosystem, the frenzy in relation to the technology (installation period), boom-and-bust cycle may not create enough pain which fuelled the bitcoin bubble of 2017. The subsequent for potentially drastic, although required, changes in period, which has been called “crypto winter”, has seen institutions. These cycles may be a curiosity in the eyes the involvement of other actors (including regulators) and of outsiders. However, there is an increasing interest a “normalization” of the development of cryptocurrencies, in the mainstream financial sector, and stories of small including with the interest of central banks. At the same everyday investors who lost all their savings in the latest time, the emergence of blockchain platforms such as bust may start to be heard. Unfortunately, usually, only Ethereum, smart contracts and the entire whole new set after many such cases, there is the required push of innovations around DeFi could create the conditions for an institutional change of laws and regulations to for a new cycle of installation fuelled by self-financing address the risks.

Figure 7 Recurring phases in the blockchain innovation cycle

Blockchain 1.0 . Blockchain 2.0 . Blockchain 3.0 .

Mature Mature B 1.0 B 2.0

Installation Deployment Installation Deployment Installation of B 1.0 of B 1.0 of B 2.0 of B 2.0 of B 3.0 Turning int Turning int Turning int

Gestation Gestation of B 2.0 of B 3.0

Tie

Source: UNCTAD, based on Perez (2002). 28 Harnessing rapid technological change for inclusive and sustainable development

Awareness of the potential recurrent nature of this able to strategically diversify their economies into sectors process is important for the understanding of the that are associated with the new paradigm. Catching up blockchain innovation. Given that all these innovations would increase real incomes and government finances are being promoted under the same umbrella of that could be used to accelerate the progress towards blockchain technology, that may make it very confusing, the Sustainable Development Goals. particularly for those who are outside of the ecosystem, to understand at which stage the various innovations C. POTENTIAL UNINTENDED CONSEQUENCES are. Innovations on the “new thing” will be in the irruption and frenzy phases, while the previous innovations This section discusses potential unintended will be a deployment period. Governments and their consequences that require attention, regardless of the regulators, and civil society at large may be asking for, visions discussed in the previous chapters. studying and proposing new regulations and laws that could address the previous boom and bust, but not a 1. Environmental impact potential new one. Thus, it could create a situation in which regulators are constantly behind the curve, ever High energy consumption presents one of the main pressed to understand how to deal with the latest bust issues of blockchain technology (particularly in its while the new one is already in the process of gestation. application to a bitcoin). The situation is changing as technology develops but, as the latest data show, due Many of the innovations, as discussed in previous to the complicated validation and securing processes, chapters, are global in nature. By focusing on the bitcoin was using as much energy consumption as financial sector, they ride the long wave of the Switzerland (BBC News, 2019), and consumption globalization of financial services that has been the has been growing in the recent years (table 3). This reality of the past decades. New regulation and consumption generates CO2 emissions that pose institutional change in such a globalized environment are a threat to the environment. According to a recent extremely challenging. It would require a strengthening study, the electricity used for Bitcoin produces about of international cooperation on finance and political will 22 megatons of CO2 annually (Science Daily, 2020). to tackle difficult problems, such as financial evasion. That is as much as Kansas City in the United States. There is also considerable variation in the consumption Governments and regulators in developing countries of energy for the work of Bitcoin, that is, the result usually face additional challenges due to low capacity of the number of transactions in the blockchain. For and resources to keep abreast of the developments in example, the consumption of energy peaked first during the technology and the innovation ecosystem. There the 2017 cryptocurrency boom (figure 8). is an urgent need to support these Governments, particularly in low- and lower-income developing At the same time, the damage done by the energy countries, including the least developed countries, use of one of blockchain’s application – bitcoin – can in building their national capacities in engaging with be compensated by other blockchain possibilities (see blockchain innovation. box 7). Environmental and natural resource challenges are often coming from insecurity and the inability to A new technological–economic revolution driven by verify the implementation of regulations and effectively blockchain and other Industry 4.0 technologies also incentivize people to follow them and respect entitlements offers a window of opportunity for some countries to use a natural resource, etc. Blockchain could help to catch up and others to forge ahead. It was during to address these challenges by offering a secure and the “Age of steal, electricity and heavy engineering” in verifiable record of who exchanges what with whom the late 1800s that what are currently Germany and and who has what at a given time. It also can be used the United States overtook the then Great Britain in to reinforce entitlements to use a natural resource, technological leadership, and it was at the beginning substantiate claims of reduced environmental impact of the “Age of information and telecommunications” in and incentivize environmentally sustainable actions. the 1970s and 80s that countries in Asia such as the There are several mechanisms through which blockchain Republic of Korea and Singapore inserted themselves might support ecological sustainability, but three main into the production of electronics with a large scope for ones are product origins, behavioural incentives and productivity gains and increasing returns of scale (Perez, resource rights. Table 4 shows examples of applying 2002). A potential new technological revolution may offer blockchain to environmental sustainability challenges in the same opportunities for developing countries that are various sectors through these mechanisms. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 29

Table 3 Environmental impact of Bitcoin

Electricity consumption by Comparison Year Source bitcoin Annual energy consumption Cambridge Bitcoin Electricity Consumption 67.4 tWh 2020 of Switzerland Center 45.8 tWh 2018 The Carbon Footprint of Bitcoin Annual energy consumption 22 tWh 2015 Energy Market Barometer Report by GEM Ireland Incandescent lightbulb of Up to 215 kWh per transaction 2015 Energy Market Barometer Report by GEM 25W burning for one year 300 kWh per transaction More energy per transaction 2018, Bitcoin Growing Energy Problem reaching 900 kWh per than all the world’s banks 2019 transaction (by 2018) put together BBC news article Source: UNCTAD.

Figure 8 Consumption of energy by Bitcoin (TWh annualized)

aiu

tiate iniu

cter cter cter cter cter

Source: UNCTAD, based on Cambridge Bitcoin Electricity Consumption Index.

Table 4 Mechanisms through which blockchain might support environmental sustainability

Product origin Behavioural incentives Resource rights Assurance about the reward Assurance about who has what Assurance about the environmental for environmentally sustainable right to what share of a natural sustainability of production practices resource Energy Peer-to-peer trading in renewables Renewables investment Forests Payment for ecosystem services Sustainable supply chain traceability Fisheries Water Resource rights trading Source: Sève et al. (2018). 30 Harnessing rapid technological change for inclusive and sustainable development

Box 7 Blockchain for climate change solutions Blockchain can add value in the fight against climate change through contributing to greater stakeholder involvement, transparency and engagement and helping bring trust and other innovative solutions, leading to enhanced climate actions. Blockchain has been deployed to support climate-related projects in many innovative ways

Kultur-Token: a pilot project to incentivize climate-friendly mobility choices in Vienna The development of the world’s first Kultur-Token application (KT) was launched in Vienna in 2019. The KT is a governmentally owned application with the primary Goal of incentivizing citizens in Vienna towards sustainable mobility behaviours that reduce greenhouse gas emissions associated with cars. This pilot project rewards

environmentally friendly behaviour with free admission to cultural events: in exchange for actively reducing CO2 emissions by walking, cycling or using public transport, citizens receive a virtual token that they can exchange for tickets to renowned cultural institutions. The KT application uses motion tracking to measure the distances

users travel in active travel modes and calculates their personal CO2 balance (CO2 saved by walking, cycling or using public transport compared to travelling the same distance by car).49 The KT uses a Proof of Authority (PoA blockchain) technology, which is an adaptation of the Ethereum blockchain and is a less energy-intensive option than the traditional Proof of Work (PoW) technology.50

DAO IPCI: world’s first transaction of green assets in the blockchain The Russian Carbon Foundation initiated the development of the DAO IPCI platform in 2017 for green financial instruments (presented at the COP23, COP24 and COP25 climate conferences) and the Blockchain Climate Standard, a standard for issuance and verification of carbon units. DAO IPCI also develops smart contracts and blockchain technology-based independent ecosystems designed for carbon market instruments, including carbon compliance units, carbon-offset credits, environmental assets, accounting and transaction data. In 2020, based on the platform’s experience, a new protocol was to be developed in partnership with the UNFCCC to issue and monitor green bonds using blockchain.51

Climate Ledger Initiative: a cooperative multi-stakeholder platform for climate change Climate Ledger Initiative (CLI) is a Zurich-based platform that assesses and tests the potential of blockchain for implementing the Paris Agreement based on concrete applications in both developing and developed countries. The distributed nature of blockchain fits the decentralized, bottom-up structure of the Paris Agreement on climate change; it can help build and manage globally accepted solutions and enhance trust in international cooperation among multiple stakeholders. The CLI addresses policy and research questions and identifies specific innovation opportunities to contribute to climate change mitigation and adaptation and accelerate the implementation of the Paris Agreement by enabling the testing of concepts and approaches in concrete use cases.52 Source: UNCTAD, based on contributions from the Governments of Austria, the Russian Federation and Switzerland, available at https://unctad.org/meeting/commission-science-and-technology-development-twenty-fourth-session.

2. Criminal activities At the same time, the fact that all transactions are recorded gives the opportunity to track activities and Cryptocurrency may have a special appeal for provide estimates of how much is associated with crime. criminals due to its semi-anonymous and decentralized For example, Chainalysis in its 2020 Crypto Crime characteristics. It gives opportunities for money report shows that the share of illicit cryptocurrency rose laundering and illegal fundraising, abusing the system in 2019 to reach 1.1 per cent of all activities (around by hacking and taking advantage of vulnerable and not US$11 billion) (Chainalysis, 2020). experienced people. For regulators, it is important to keep tracking the 49 See https://digitales.wien.gv.at/site/en/projekt/culture-token/. development of illicit activities and consider the main 50 Contribution from the Government of Austria, available trends in this area, which include the following: at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c01_HB_Austria_en.pdf. 51 Contribution from the Government of the Russian Federation, (a) The majority of criminal activities in cryptocurrency available at https://unctad.org/system/files/non-official-docu- are associated with a small segment of white- ment/CSTD_2020-21_c25_B_Russia_en.pdf. collar criminals. Thus, individuals with access 52 Contribution from the Government of Switzerland, available at https://unctad.org/system/files/non-official-document/ to privileged information and their activities may CSTD_ 2020-21_c29_B_Switzerland_en.pdf. need to be under special supervision. IV. The potential impact of blockchain on the achievement of the Sustainable Development Goals 31

(b) Money-laundering is crucial for cryptocurrency 3. Inequality crime as all criminals need to convert holdings into cash. Understanding the work of As in other areas, the connection between blockchain sophisticated services and networks designed and inequality cannot be described unequivocally. for money-laundering and their interaction with There are several channels, through which inequality criminals may help in the choice of effective is affected, in various direction. The final effect may policies to deal with it. depend on public policies acknowledging and leveraging the use of such channels. (c) Scams make most of cryptocurrency-related crime, accounting for almost US$9 billion in Opportunities provided by cryptocurrencies are fully 2019. Thus, consumer protection should be one enjoyed by only a few due to the cost of access, of regulators’ priority; currency exchanges can complexity, etc. Statistics show that inequality among play a crucial role in informing and protecting cryptocurrency holders is notoriously high. According the public. to bitinfo,53 considering the total number and value of various cryptocurrencies holders, 50 per cent of As blockchain technology evolves, cryptocrime all bitcoin addresses hold less than 0.01 bitcoin and will likely continue to evolve in both scope and almost 90 per cent hold less than 1 BTC; 95 per cent technological sophistication. Some trends in the future of coins are held by only 3 per cent of all addresses may include using more non-custodial mixers, using (figure 9). chain hopping (swapping one type of cryptocurrency for another to obfuscate the path of funds) as an alternative to mixing, use of privacy coins by criminals due to higher anonymity and increasing the anonymity 53 See https://bitinfocharts.com/top-100-richest-bitcoin- of P2P exchange options. addresses.html.

Figure 9 Share of coins and addresses by balance (Percentage)

Share of coins (%)

Share of addresses (%)

( ) ) ) ) ) ) ) ) ) )

Source: UNCTAD, based on Bitinfo, October 2020. 32 Harnessing rapid technological change for inclusive and sustainable development

At the same time, several blockchain applications could on the identities of the parties in the transactions; this help to reduce inequality. Some examples from various thus causes a threat to personal privacy. With the rise regions of the world are listed below: and widespread adoption of this technology, data breaches could become frequent. In particular, nodes • Blockchain micro-lending applicationss have been in public blockchains have direct access to the data in introduced in South-East Asia to help people get a the blockchain, and in the absence of clear regulations, credit history on the blockchain. In 2018, 1.7 billion it may cause significant business risks. unbanked people could be potentially reached by these applicationss (Carter, 2020). The most significant cases of blockchain privacy failure include the hacking of theMtGox Bitcoin exchange in • In 2017, US$5 million worth of bitcoin were donated 2014, when hackers were able to steal US$450 million to a charity organization in Kenya that was helping in Bitcoin and were not identified. The Coinbase people to get access to clean water and was sending cryptocurrency exchange was attacked in 2012; personal direct payments to people in poverty, helping with email addresses were used to change verification food and other living expenses and school tuition numbers, allowing hackers to access wallets. DAO was (Cheong, 2020). hacked in 2016; hackers stole up to US$100 million, • Blockchain technology can help to connect directly according to some estimates. Hackings often occur as with the public for fundraising with Initial Coin discussed in the section above (“Criminal activities”); Offerings (ICOs). The ability to tokenize and portion while the magnitude of hackings has declined, the out ownership of any asset class, such as real estate, potential loss is significant. art etc., can open financial opportunities for middle- and lower-class consumers. At the same time, blockchain technology, due to data transparency and integrity features, can improve privacy 4. Privacy by verifying and managing consent; providing individuals with clear notifications and records of personal data usage Privacy is another issue at the centre of the debate across distributed systems and minimizing data sharing when deploying blockchain in different applications. between data controllers and their processors. Some Privacy in blockchain can imply the ability to perform researchers suggest that self-governing blockchain- transactions without leaking identification information, enabled identity and data management solutions can still allowing the user to remain compliant. Despite the provide the preferred way to maintain and demonstrate fact that transactions and data are authenticated through data privacy. For now, it is important for policymakers to cryptography, it is possible to access the data, including, better tailor data privacy laws, regulations and guidance in some applications using blockchain, the information for blockchain use cases. V. Harnessing blockchain for sustainable development 33

V. HARNESSING BLOCKCHAIN FOR SUSTAINABLE DEVELOPMENT

This chapter discusses the challenges that Governments simultaneously develop national capabilities to develop face and what they should do to influence the rate and and enforce regulations for blockchain. direction of innovation and competence building in blockchain to contribute to their national development Similarly, blockchain is still in incipient stages of priorities and accelerate the progress towards the standardization and continuously surrounded by Sustainable Development Goals. highly contested terminology. Standardization will be an essential step towards more comprehensive regulatory One of the challenges that most developing countries frameworks. Currently, the problem is twofold. On the continue to face is to counteract the effects of the one hand, the lack of regulation limits the capacity global concentration dynamics in the production and of Governments to cope with fraud, local regulatory development of technology. Blockchain innovations are compliance and tax evasion. On the other, it hinders no exception. While this does not prevent Governments technology adoption and innovation, primarily affecting from leveraging blockchain to accelerate their progress entrepreneurs and start-ups, which are often confronted towards the Sustainable Development Goals, it does with the uncertainty of being incurring a legal problem. have significant implications in the associated costs of such an undertaking. The most crucial challenge is The lack of standardization among blockchains can be the then to promote competence building in blockchain source of additional problems related to interoperability. in such a way that a country develops the capacity to For example, the costs of integrating blockchains into use, but also to create customized versions suited to financial infrastructures like payment and settlement their conditions and needs. systems require not only industry-wide coordination and collaboration but also demands significant expenses. Another critical challenge is the misconception of what Systems integration problems related to legacy systems new technologies can do. For many, blockchain still are not an exclusive challenge of developed countries. represents an abstract technology with unclear benefits. To a different extent, though, Governments in developing It is generally believed that technology is about bringing countries are also confronted with the challenge of full transparency to transactions. Blockchain can do this ensuring that blockchain systems can be integrated if required, but it is not entirely true that everything will with the existing infrastructure, yet often incompatible be transparent. Another misconception is that it only systems. serves for traceability purposes. The challenge is to build awareness of what blockchain is and what problems it can solve if correctly implemented. Many start-ups The discussion in the following section present policy are trying to sell off the shelf solutions to governments recommendations covering two main areas: (a) building without a sound assessment of whether the physical capacities for strengthening the national ecosystem for system is ready to be put into a blockchain and without blockchain innovation; and (b) creating the regulatory an adequate return on investment assessment. environment for support blockchain innovation, while addressing potential risks. Blockchain regulations will require concerted efforts for both establishing and enforcing rules. Blockchain-based A. BUILDING CAPACITIES FOR systems that are part of a global network further increase STRENGTHENING THE NATIONAL SYSTEM the complexity. In systems that are powered by the FOR BLOCKCHAIN INNOVATION combined computational power of nodes with different geographical locations, under various legislations, and National innovation systems determine the rate and where there is no central party governing and operating direction of innovation in a country. The following sections the system, who should be held responsible and provide recommendations for and examples related to accountable for misbehaviour or failure? Alternatively, countries at different levels of development, in recognition how can liability be apportioned? The challenge for that their innovations systems have characteristics that developing countries is two-fold: first, to increase their require targeted policy advice. However, it is essential engagement with global digital governance; second, to to note that this is a presentation choice and that each 34 Harnessing rapid technological change for inclusive and sustainable development

recommendation is also relevant to countries at different For low-income countries, harnessing blockchain levels of development. technology will first require the development of digital infrastructure and skill training. The process The discussion will focus on the following areas: must incorporate STEM education, cross-linkages between research and commerce, fast technological • Low and lower-middle-income developing countries: adoption in the industry and the development of build the basic human capacity and infrastructure, pilot projects that showcase the value of blockchain and start pilot projects, that could kickstart the technology. Although cryptocurrencies are still the diffusion of blockchain. most frequent implementation of the technology, low- and lower-middle-income developing countries • Upper-middle-income country: facilitate the linkages can also benefit from blockchain applications in of their national innovation system with the global manufacturing, health care, energy and Government. ecosystem of innovation in blockchain to create To develop technological capacity, Governments opportunities for their firms to engage, contribute must encourage innovation and create opportunities and benefit from the development of the technology for skill development, for example, in cryptography, and the rapid pace of innovation. data structures and web development for advances in blockchain adoption. An effective policy platform High-income countries: develop legal and policy • will combine enhanced STEM training, bilateral frameworks that allow organizations and the public to collaborations and knowledge transfers, operational benefit from blockchain technology while minimizing support infrastructure, and financial investment in its risks and protecting users. blockchain pilot projects. 1. Low- and lower-middle-income developing countries Identify and form groups of blockchain experts

With numerous benefits that could come from Blockchain being a nascent technology, the expertise the use of blockchain technology, low and lower- required for implementing blockchain at scale will not middle-income developing countries also face several be readily available in low- and lower-middle-income challenges given their prevailing policy framework, developing countries. Governments could identify state of infrastructure for digital tools and quality of and invite experts in law and technology, with various human resource for technological advancement. degrees of expertise in blockchain, from academia The challenges of poor and costly internet service, and industry to join an advisory board. This advisory unstable and sometimes non-existent electricity as board would inform the regulatory process and develop well as lack of know-how are incredibly daunting in the strategies to attract technical talent and investment in deployment and utilization of blockchain technology blockchain ventures. For example, South Africa has and must be addressed for any meaningful leverage established a partnership between research, industry of the technology in these countries. and Government called SANBA to develop blockchain implementation in the South African context.54 Similarly, other countries can benefit from the expertise of an Low and lower-middle-income developing countries’ advisory board to guide policy framework, content ability to overcome these challenges, could mean knowledge and technical infrastructure for digital a chance for a leap in areas of financial inclusion, Government. financial technology, e-governance (including digital IDs, taxation), international trade, interoperability IT systems and digitization of supply chains. Countries Invest in research institutions and graduate programs where efficiency and trust are low can benefit the in advanced STEM fields most from blockchains. However, the technical infrastructure needs to be assessed and the system Investing in education is a crucial step to increase requirements specified for a technical upgrade where the rate of adoption of blockchain and other frontier appropriate, which can be pricey, especially for technologies. Universities should be incentivized to economies with limited financial resources such as improve training on cryptography, data structures, the least developed countries. In that context, many software infrastructure and web development, member States will seek financing from donors, making donor coordination a pivotal aspect to 54 See https://cointelegraph.com/news/south-african-national- success. blockchain-alliance-holds-online-launch. V. Harnessing blockchain for sustainable development 35

along with other related fields related to Blockchain Box 8 technology. Increasing research capacity will National blockchain associations and support the training of practitioners and experts laboratories who understand and implement blockchain. The Cuba. Since 2017, the Cryptography Institute of link between research, young talent and industry the Faculty of Mathematics and Computing of the can be further facilitated by research institutions, University of Habana in Cuba investigates the potentials hackathons and job fairs. For example, Australia55 of blockchain technology, with the aim of evaluating and and Malaysia56 have established research institutes assessing the possible applications of this technology to provide a low-stakes environment for firms and in the country. The results obtained to date have been researchers to experiment with blockchain solutions, made available to the Business Group on Informatics and Communications (GEIC), the Central Bank of Cuba and the city of Daegu in the Republic of Korea is and the Union of Jurists.58 reported to have allocated $6 million to promote blockchain and artificial intelligence education.57 Kenya. In October 2017, the Blockchain Association of As a first step, public universities should acquire Kenya was established as a non-profit organization under the Societies Act Cap 12 Laws of Kenya to promote the the required technical equipment and hire skilled adoption of blockchain and cryptocurrency technology personnel. Grants, scholarships and competitive in Kenya and East Africa by building a network of awards can inspire talent development and help competent homegrown human capital.59 universities develop qualified practitioners. Latvia. In 2017, the Latvian Blockchain Association was established to promote the research and deployment Establish associations, laboratories, incubators and of blockchain technology.60 consultancies for the blockchain industry Romania. A blockchain hub in Romania, Modex Blockchain Labs, is devoted to blockchain development. The development of the blockchain in lower-middle- It is a blockchain database company that innovates to income countries can be better facilitated with solve the last mile adoption problem of the blockchain. active support services focused on blockchain. It offers services for the entire blockchain technology For example, national blockchain associations and ecosystem: marketplace for smart contracts, community laboratories play a relevant role in the innovation and tools for developers, and Blockchain Database solutions development of blockchain (see box 8 for examples for enterprises.61 from countries of different levels of development). Saudi Arabia. Saudi Arabia is committed to establish a The Goal is to build core capacity not only in the Blockchain Laboratory to test and experiment with ideas technology itself, but also the policy implications, and solutions to develop and enhance the Government’s economic impact and regulatory frameworks. The procedural services, and to come up with a plan that process could be initiated by the advisory board, will improve the quality of government services provided aided by the relevant ministries, that assesses the to citizens using Blockchain technology. 62 best use cases of Blockchain technology in the Source: UNCTAD, based on contributions from the context of the respective country. For countries Governments of Cuba, Kenya, Latvia, Romania and Saudi which have more mature technological industries, Arabia, available at https://unctad.org/meeting/commission- organizing international cooperation projects that science-and-technology-development-twenty-fourth- session. are blockchain focused will accelerate the rate of successful deployment and facilitate knowledge transfers. These consultancy services can support 58 Contribution from the Government of Cuba, available at initial developments in blockchain technology within https://unctad.org/system/files/non-official-document/ Government and the private sector, providing CSTD_2020-21_c04_HB_Cuba_es.pdf. 59 technical, organizational and managerial services. Contribution from the Government of Kenya, available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c17_HB_Kenya_en.pdf. 60 Contribution from the Government of Latvia, available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c21_B_Latvia_en.pdf. 55 See https://www.coindesk.com/austrian-government-backs- 61 Contribution from the Government of Romania, available new-blockchain-research-institute. at https://unctad.org/system/files/non-official-document/ 56 See https://www.coinspeaker.com/magic-with-mba-has- CSTD_2020-21_c24_HB_Romania_en.pdf, and https:// launched-blockchain-researcher-lab-program-in-malaysia/. modex.tech/. 57 See https://cointelegraph.com/news/this-south-korean- 62 Contribution from the Government of Saudi Arabia, available city-is-spending-millions-to-turn-people-into-blockchain- at https://unctad.org/system/files/non-official-document/ experts. CSTD_2020-21_c27_B_Saudi%20Arabia_en.pdf. 36 Harnessing rapid technological change for inclusive and sustainable development

Establish pilot programmes to build trust in a large number of small transactions with low overhead blockchain technology: costs. There are also several examples of blockchain use case developed in Uganda, including a free zone to focus Initiating pilot programmes through public services can be on blockchain and emerging technologies, the use of an opportunity to experiment with blockchain solutions and blockchain to identify counterfeit drugs and to prevent their demonstrate its value. For instance, Kenya has implemented distribution in the pharmaceutical supply chain, and projects its first blockchain and smart-contract based retail bond on blockchain in the agri-food value chain (see box 9). M-Akiba, a government bond which can be purchased without a bank account.63 M-Akiba accounts are easy The pilot project does not necessarily have to involve to set up quickly with mobile phones, and minimum digital payment systems and value chains. Other investments are comparatively low ($28 approximately), examples include data-sharing between departments, making it accessible to a large number of unbanked users. verifying bids in public contracts, or creating a public Blockchain and smart contracts allow M-Akiba to manage data portal. Once a successful project is launched, more initiatives will learn from its challenges and develop 63 https://www.coindesk.com/world-bank-to-support-block- institutional knowledge in blockchain implementation. chain-bonds-trial-in-kenya

Box 9 Blockchain use cases in Uganda In September 2019, the Uganda Free Zones Authority issued a licence for the establishment of a free zone to focus on blockchain and emerging technologies to Blockchain Technologies Ltd., and its parent company CryptoSavannah.64 Uganda is the first country in Africa to issue this type of license. The free zone will contribute to establishing Uganda as the continental leader in blockchain and other Fourth Industrial Revolution (4IR) technologies. The Government hopes to combat the sale and distribution of counterfeit pharmaceuticals in Uganda and the EAC. The contracted MediConnect blockchain-based platform enables the recording of prescription medication, thus identifying counterfeit drugs and preventing their distribution in the pharmaceutical supply chain. According to the Ugandan National Drug Authority, 10 per cent of prescribed medications have counterfeits on the market.65 FAO and Ministry of Agriculture, Animal Industry and Fisheries of Uganda (MAAIF) have started another pilot project aiming to increase knowledge and improve the capacity of blockchain technology for agri-food value chain development for stakeholders in public and private sectors in Uganda, including policymakers and those representing smallholder farmers, SMEs, women, youth and rural communities. Some specific objectives and activities include: (a) identifying key areas of blockchain applications (e.g., supply chain management, certification, food safety, smart contracts and e-commerce) and key-value chains for blockchain applications, and provide recommendations for adopting blockchain and related technologies for agri-food value chain development in Uganda; (b) developing a training programme for blockchain and related technologies for agri-food value chain development with relevant use cases and companies invited to share experiences and carry out training and various consultations, and overall to increase knowledge and build the capacity of stakeholders in public and private sectors; (c) disseminating findings and recommendations and promoting experience sharing through webinars and workshops and knowledge products; and (d) engaging stakeholders through a participatory approach and promoting synergies of stakeholders and initiatives as well as partnerships and investment and innovation opportunities to ensure sustainable impacts.66 In other sectors, the South African coffee trader Carico Café Connoisseur, which trades quality Ugandan coffees like Bugisu Blue, has started tracking and tracing exports using blockchain technology.67 A cryptocurrency exchange, Binance Uganda, has been active since June 201868 and has, to date, 40,000 registered users.69 With its large young and unbanked population, Uganda is seen as having potential for the deployment of cryptocurrencies. However, the Ministry of Finance has advised parliament that it is working on introducing regulations to govern cryptocurrencies, as there have been reports on the emergence of pyramid schemes branding themselves as crypto projects, with the usual consequences for naïve speculators.70 Source: UNCTAD and contributions from FAO, available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c11_B_FAO_en.pdf.

64 www.unlock-bc.com/news/2019-09-17/uganda-announces-blockchain-freezone. 65 cointelegraph.com/news/uganda-to-deploy-mediconnects-blockchain-platform-for-tracing-fake-drugs. 66 Contribution from FAO, available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_c11_B_FAO_en.pdf. 67 See http://www.reuters.com/article/us-uganda-coffee/ugandan-firm-uses-blockchain-to-trace-coffee-from-farms-to-stores-idUSKC- N1PH1ZW. 68 See http://support.binance.co.ug/hc/en-us/articles/360006720911-Official-Launch-of-Binance-Uganda-Fiat-Crypto-Exchange. 69 See http://cryptobriefing.com/uganda-blockchain-hub/. 70 Ibid. V. Harnessing blockchain for sustainable development 37

Integrate blockchain-based services to existing so blockchain practitioners can be technologically and platforms organizationally prepared to benefit from blockchain technology. The rapid pace of change in the technology Pilot projects can help promote blockchain applications itself and the long timeframe that such capacity and get users and builders interested in the technology’s development demands call for strategic and concerted potential. However, using blockchain to enhance efforts to build capabilities in the blockchain-related existing digital service can be more achievable, and at areas. There is considerable potential for blockchain times more useful, than creating new applications. The applications to integrate with existing digital infrastructure Government, aided by the advisory board, can assess and create value through inclusion and expansion where the technology could be relevant, appropriate and unachievable through traditional digital services. best used in the active digital services and implement integration projects to make digital services faster, Establish a national blockchain strategy more cost-effective, and more secure. India, Georgia and Ghana are working to incorporate blockchain- Defining the policy objectives regarding blockchain based land-registry databases within existing land title technology in a national strategy is necessary for long- systems. The immutability of blockchain ledgers suits term planning and coordinated development. It will define the challenge of solving land disputes using falsified a Government’s vision for blockchain to investors and documents. In Turkey, a project is being implemented on businesses, therefore clarifying the regulatory stance, the use of blockchain technology in digital identification eliminating ambiguity regarding public development systems to promote understanding and demonstrate and avoiding patchwork regulations at different levels of the benefits of the technology (box 10). Government. A national strategy will also clearly identify how blockchain could contribute to the national priorities Box 10 and the role it will play in the public and private sector (see Turkey: Blockchain-based Next Generation box 11). Regulatory bodies can take steps to understand Decentralized Digital Identity Infrastructure the technology and its use cases in cryptocurrencies, smart In Turkey, the National Research Institute of Electronics contracts, databases and supply chains to devise sector- and Cryptology (TÜBITAK BILGEM UEKAE) is working specific regulatory frameworks. A national strategy can also on the Blockchain-based Next Generation Decentralized establish necessary ethical standards and emphasize the Digital Identity Infrastructure (MODKA). This infrastructure principles along which blockchain applications will be built. will be integrated with existing identity systems and other infrastructures so that it can be used as the future It will also survey the landscape for blockchain development national digital identity management backbone of Turkey. and identify advanced and emerging sectors. The process The MODKA will be prepared for the Internet of things will enable the Government and the private sector to work (IoT) by drawing the framework of digital identity life together through the techno-economic transition, create cycles for legal entities. Blockchain technology will be signposts for future development and ease blockchain combined with the cryptographic and e-identity expertise of TÜBITAK. All components needed within the scope adoption for both the public and private sectors. of the digital identity ecosystem are developed at the prototype level. When MODKA is put into use on a Blockchain incubators, innovation hubs and national scale, it will pave the way for many structural transformations with the leading role it will assume in the networks electronic transformation of national information systems. Source: UNCTAD, based on contributions from the Government Alongside investing in public education in science of Turkey, available at https://unctad.org/system/files/non- and technology, establishing research institutions, official-document/CSTD_2020-21_c33_B_Turkey_en.pdf. innovation hubs and blockchain focused incubators and networks can accelerate the rate of adoption of 2. Upper-middle-income developing countries blockchain applications and innovation to overcome the technology’s current challenges. For example, Although blockchain is still in the early stages of adoption in Turkey, the Blockchain and Research Network in many upper-middle-income countries, it is more likely (BAG) platform has been established to facilitate that these countries have the technical foundation and the research and development activities on blockchain human resources for rapid technological adoption. Most technology. The BAG platform aims at increasing regulation around blockchain in upper-middle-income national know-how rapidly by enabling researchers countries are still undecided. The challenge for many of to work in various fields of blockchain to develop these countries is to connect the domestic innovation fruitful projects together by combining their efforts system and the global ecosystem of innovation, and using resource more effectively. 38 Harnessing rapid technological change for inclusive and sustainable development

Box 11 National strategies for blockchain development Countries are committed to develop and implement national strategies to promote the long-term development of blockchain and its uses, through innovation and pilot applications, and close cooperation between the private and public sectors for best results.

Kenya. The Government of Kenya possesses a strong history with respect to the involvement in and prioritization of digital agendas. The willingness of Kenya to embrace innovation in partnership with the private sector has earned the country the moniker of “Africa’s Silicon Savannah”. This innovative, forward-leaning approach to national development is reflected in the Big Four Agenda of Kenya, which will be supported and enhanced by leveraging emerging technologies. The Big Four Agenda focuses on food and nutrition security, affordable housing, enhancing manufacturing and universal health coverage.71

Russian Federation. Blockchain technology development is a part of the activities provided for by the federal project Digital Technologies under the National project Digital Economy of the Russian Federation. Blockchain technology is also mentioned in the Strategy of Information Society Development in the Russian Federation for the period of 2017–2030. A road map for developing the “end-to-end” digital technology of “distributed register system” was drawn. The road map envisages the use of blockchain in industry, finance, logistics and Government. According to the road map, all State information systems are planned to be transferred to blockchain.72

Saudi Arabia. Saudi Arabia adopted “Vision 2030” as a road map for economic growth and national development; it involves public, private and non-profit sectors rolling out an integrated governance model established by the Council of Ministers. The national strategy aims at adopting advanced technologies for the greater good of the country. A relevant initiative is to develop a Blockchain Laboratory with the aim of testing and experimenting with ideas and solutions to develop and enhance the Government’s procedural services, and to come up with a plan that will improve the quality of government services provided to citizens using blockchain technology. 73

Thailand. To harness the potential of the fourth industrial revolution, Thailand has implemented a number of policies known as Thailand 4.0 – a visionary scheme to transform the country into a value-based and innovation- driven economy. In keeping with Thailand 4.0’s emphasis on the use of digital technologies to spur national economic growth and development, local blockchain start-ups have a critical role to play as catalysts for the promotion of digital innovation in Thailand. Leading by example, the Government of Thailand is experimenting with using distributed ledgers in the operations of its various State agencies. The Government has identified three main blockchain project areas (in transport and logistics, banking and finance, and digital identity) that could also be valuable cases for other blockchain players in South-East Asia. 74

Turkey. Blockchain has been a national priority in Turkey. The Eleventh Development Plan (2019–2023) states that blockchain-based digital central bank money will be implemented, and it is planned that processes and technological infrastructure will be improved to utilize new technologies such as big data, cloud computing, mobile platforms, the Internet of things, artificial intelligence and blockchain in the development of public services (e.g. e-government). Furthermore, as emphasized in the 2023 Industry and Technology Strategy developed by the Ministry of Industry and Technology, the development of the national blockchain infrastructure will be encouraged to create a blockchain-based network.75

Source: UNCTAD, based on contributions from the Governments of Kenya, the Russian Federation, Saudi Arabia, Thailand and Turkey, available at https://unctad.org/meeting/commission-science-and-technology-development-twenty-fourth-session.

71 Contribution from the Government of Kenya available at https://unctad.org/system/files/non-official-document/CSTD_2020- 21_c17_HB_Kenya_en.pdf. 72 Contribution from the Government of the Russian Federation available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c25_B_Russia_en.pdf. 73 Contribution from the Government of Saudi Arabia available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c27_B_Saudi%20Arabia_en.pdf. 74 Contribution from the Government of Thailand available at https://unctad.org/system/files/non-official-document/CSTD_2020-21_ c30_B_Thailand_en.pdf. 75 Contribution from the Government of Turkey available at https://unctad.org/system/files/non-official-document/CSTD_2020- 21_c33_B_Turkey_en.pdf. V. Harnessing blockchain for sustainable development 39

These institutions can become the ground zero for Deciding on the guiding principles can signal future building technical knowledge and accelerate the developments in the regulatory space such as policies development of enterprise-ready applications. Research governing privacy and interoperability. For example, the institutions can also boost general understanding of principle to uphold technology neutrality – policies that blockchain technology, and trust in its applications, ensure a level playing field for all commercial entities and provide an environment for experimentation and using blockchain technology – will promote a more design testing. Japan,76 Malaysia77 and Singapore78 have equitable business environment. The principles should gone further and created sandbox policy environments ideally guide regulation to be permissive rather than to test the limits of blockchain technology, especially restrictive, to build trust and invite innovation while cryptocurrencies, and its interactions with other digital creating the enforcement capacity to prevent harm to systems.79 users. Blockchain principles can also guide regulation for cryptocurrencies, taxation, the legal status of smart Specialized blockchain task force contracts and supply chain management, among other applications. Upper-middle-income countries can develop a multi- stakeholder blockchain task force to develop expertise Establish standards for interoperability in blockchain technology and policy. Certain countries have existing working groups, such as the federation With various blockchain services operating in tandem, of banks (FEBRABAN) of Brazil, which is tasked with establishing common encryption and data standards examining Blockchain and its impact on the banking can facilitate interoperability and create ecosystems sector.80 The focus of these task forces will be to where blockchain services work together to provide develop a technical understanding of Blockchain greater value. Establishing standards will build resilience within the Government and monitor international in applications and reduce the risk of a fragmented developments in the technology. It will prepare the blockchain ecosystem (with potential disadvantages such Government for understanding the regulatory practices as vendor lock-in). Accessible blockchain ecosystems will for Blockchain as well as identify potentially harmful lower the barrier to entry for new ventures and encourage cryptofinancial activity. The taskforce can also verify investment in the technology. However, setting standards whether blockchain usage is necessary for specific that are too rigid, and are enforced before the technology tasks and whether easier ways to accomplish the has stabilized, will result in expensive transitions in the tasks are available. future. Governments will need to balance promoting the establishment of standards for faster adoption, while Develop blockchain guidelines and principles being flexible enough to account for rapid changes in technology and how it is used. Government stakeholders can develop best practices and foundational principles to guide the development Identify key use cases and form strategic of blockchain integration. The guidelines will define the collaborations kind of operations that can benefit from blockchain solutions and those that are more suitable for traditional Taking a long-term view, policymakers can identify digital services. The above-mentioned task force can key areas where blockchain applications can provide direct the development of the guidelines and principles. real value through public services. The Indian public The task force can also delineate the attributes of think-tank Niti Aayog has identified areas where different blockchain systems (e.g. private versus public) Blockchain technology can build on the public digital and suggest the best-use cases for each system. infrastructure of India.81 In Thailand, the Office of the Courts of Justice is reported to have plans to use DTL

76 to manage court records and other judicial information See https://www.forbes.com/sites/japan/2019/06/26/japans- 82 blockchain-sandbox-is-paving-the-way-for-the-fintech- by 2021. National-level assessments can identify future/#254e5ac93279. potential use cases of blockchain technology and set 77 See https://www.researchgate.net/publication/338304841_ short to medium-term milestones. Once identified, the Regulating_FinTech_Businesses_The_Malaysian_Experience. 78 See https://www.mas.gov.sg/development/fintech/sandbox. 81 See https://niti.gov.in/sites/default/files/2020-01/Blockchain_ 79 See https://cointelegraph.com/news/south-koreas-fintech- The_India_Strategy_Part_I.pdf. sandbox-creates-380-new-blockchain-jobs. 82 See https://dailyhodl.com/2020/08/22/thailand-judicial-sys- 80 See https://www.rvo.nl/sites/default/files/2018/02/brazils- tem-planning-big-shift-to-blockchain-will-migrate-records-to- beginning-blockchain-business.pdf. distributed-ledger/. 40 Harnessing rapid technological change for inclusive and sustainable development

use cases can be achieved with international and local to benefit from blockchain technology, while minimizing partners with technical expertise. For example, IBM its risks and protecting users. is working in India83 and South Africa84 to establish blockchain-based industrial supply chain systems. Establish a blockchain development committee As different use-cases are developed, partnerships can increase the rate of knowledge transfer and Business leaders and policymakers must communicate build successful models for blockchain integration. with each other to understand, innovate, regulate, Implementing blockchain in public services will signal and implement blockchain technology effectively. A institutional endorsement that will generate interest blockchain development committee can perform as a and trust in the technology. high-level forum where decisionmakers can communicate with stakeholders and identify viable pathways for Establish channels of collaboration with the Blockchain development. Like previous suggestions on international community Blockchain task forces and expert groups, the committee will have similar objectives of studying the development Countries face similar challenges to develop a climate of Blockchain technology in other countries, identifying of innovation. Creating and participating in forums use cases, advising public projects and developing the where international and local practitioners can meet regulatory guidelines in consultation with the private and share their work will provide opportunities for sector. However, the committee should also have collaboration and learning. Supporting blockchain the mandate to actively support blockchain’s growth experts, policymakers and technologists to attend within the Government through task forces in charge of conferences and training opportunities will create specific use cases, research and advisory services. The better linkages between the local innovation ecosystem committee can oversee the national blockchain road and the international community working on blockchain map and develop cross-sectoral linkages between a applications. Governments can set up scholarships for Government and the private sector. students in domestic and foreign universities working on frontier technologies. These initiatives, over time, Synergy through research and development will advance the system of innovation and develop the professional force that can use blockchain technology Although all countries have national innovations to its full potential. systems, high-income countries have the funding and human resources that increase the chance 3. High-income countries of breakthrough innovations in technology and implementation. In this regard, grants and financial For high-income countries, demand for blockchain incentives by Governments should have the role of services has increased significantly in recent years. creating incentives for innovations in the blockchain Countries have made important inroads, not only in that contribute to the Sustainable Development Goals. increasing the technological potential of blockchain, Government support for new ventures can ease this but also in creating an environment that can support burden and allow more experimental applications to blockchain applications. International competition may mature (see box 12 for an example from Portugal). bring blockchain technology to more user-friendly A Government could set up competitive grants for services, and high-income countries may stand to benefit innovative new businesses and provide institutional most from the first wave of consumer-ready applications. support. For new technologies, it is often the case that However, questions regarding interoperability, scalability, the costs of development are borne by few actors while privacy and transparency, and regulation remain the benefits are enjoyed by many. With Government unanswered, and the rate of change of the technology sharing the risks, the burden of innovation can be eased is as rapid as the results are uncertain. High-income for private firms. For example, the Government of the countries should look to develop legal and policy United States set up US$800,000 grants for firms frameworks that allow the real economy and the public working on anti-forgery blockchain solutions in 2018.85 Besides monetary support, setting up laboratories and regulatory sandboxes (elaborated below) for 83 See https://papers.ssrn.com/sol3/papers.cfm?abstract_ experimentation can further encourage innovation. id=3265654. 84 See http://www.engineeringnews.co.za/article/ibm- in-broad-partnership-to-develop-supply-chain-block- 85 See https://www.coindesk.com/us-government-offering-up- chain-2019-02-22. to-800k-for-anti-forgery-blockchain-solutions. V. Harnessing blockchain for sustainable development 41

the Government and active engagement of stakeholders Box 12 GovTech: Using blockchain to support the in the private sector (box 13). Sustainable Development Goals in Portugal GovTech is a Portuguese public competition that rewards High-income countries should also incentivize the innovative products and services provided by start- research and development required to tackle the ups and addressing at least one of the 17 Sustainable limitations in blockchain technology: the speed of Development Goals. GovTech was designed had two verification, energy consumption, network security, main goals in mind: to promote the Goals nationwide, and to stimulate the startup ecosystem and dynamism among others. Innovations within the technology will in Portugal. Start-ups usually employ young people eventually translate to greater usability and incorporation and have a reputation for being disruptive, creative and of blockchain into everyday digital services. Countries innovative, enabling their development and teaching them that can solve these challenges will be the first to benefit about the importance of the Sustainable Development from improved efficiency and will be able to establish Goals, promotes a sustained, inclusive and sustainable growth. In the first edition held in 2018, there were 113 standards that are adopted globally. projects focusing on the environment, women’s rights, the youth, migrants, fighting poverty and so on.86 Box 13 The use of blockchain in the voting phase opened to Blockchain’s supportive business climate in the public was one of the perks of this competition. Latvia To make the vote a more interesting process, a virtual Latvia incentivizes local blockchain start-ups through coin based on blockchain technology was created, a flexible tax system, tax benefits for early companies named GovTechs. Participants could vote on their with the need for funding, and issues special visas preferred projects by investing with GovTechs on the for the founders to become residents in the country. website; this insured the security and transparency of Latvia scores third place in the OECD rankings for all participatory process. The projects selected were the attractiveness of the tax system and has the Intelligent Forest Management Technologies, Green lowest financial requirements for start-up founders. 87 Salt and Healthy Life for All and Bio2Skin. The use of StartUpLatvia is a government-supported initiative for blockchain in the voting process served as a learning further fostering the ecosystem. In 2018, the Action process for the Government of Portugal as it was the Plan for the Development of Start-up Ecosystem was first time a governmental initiative used blockchain, so adopted in Latvia. One of its main objectives is to raise the Goal was also to test the potential of this emergent public awareness and promote cooperation between technology and have some lessons learned that can start-ups and the academic sector and corporations. 88 now be used in future projects. Since 2019, more focus has been brought towards the cooperation between start-ups and ICT companies, Source: UNCTAD, based on contributions from the State-owned companies, corporations and other Government of Portugal, available at available at https:// public sector bodies. unctad.org/system/files/non-official-document/CSTD_2020- 21_c23_B_Portugal_en.pdf. Latvia has also leveraged its highly qualified and skilled pool of thousands of IT professionals and software developers – out of a 1.9 million population, Create innovation incentives, support for new 30,000 people are employed in IT. Foreign companies ventures and jobs have been outsourcing their IT projects in Latvia for the past years, and software development outsourcing Through research investment, support for startups, plays a crucial role in the country’s exports. Latvia has around 6,500 ICT companies and over 400 start- academic scholarships, hackathons and workshops, ups. Many of them have already started specializing in high-income countries can also attract and foster the blockchain-based development and offer full service national blockchain ecosystem and develop the future to outsource. AXIOMA Group, Blockvis, Netcore and workforce of blockchain. Just as computer science had Soft-FX are some of the most widely known blockchain few practitioners a few decades ago, the blockchain development companies that have served Binance, Bitfinex, Bitstamp, Kraken and many other big names community is currently small. Through better job in the industry. opportunities, more people will consider a career in Source: UNCTAD, based on contribution from the blockchain development and advance the field over Government of Latvia available at https://unctad.org/ time. For example, the blockchain ecosystem in Latvia is system/files/non-official-document/CSTD_2020-21_c21_B_ highly dynamic and innovative with strong support from Latvia_en.pdf.

86 See www.govtech.gov.pt. Establish regulatory sandboxes 87 Contribution from the Government of Portugal available at https://unctad.org/system/files/non-official-document/ CSTD_2020-21_c23_B_Portugal_en.pdf. Regulatory sandboxes are special regulatory allowances 88 See www.govtech.gov.pt. to test an innovation under the supervision of regulators. 42 Harnessing rapid technological change for inclusive and sustainable development

A regulatory sandbox can allow open communication Standardization in blockchain offers a form of light- between innovators, market participants and regulators touch self-regulating mechanism that may have benefits to negotiate the right balance of regulation to reduce risks in terms of incentivizing innovation, benchmarking while not stifling innovation. For blockchain applications, technological development and promoting economic setting up sandboxes can reduce barriers to entry for growth.93 Adoption of voluntary standards can play a firms, create a supportive network for innovation and role in ensuring interoperability and avoiding unnecessary improve the chances for successful implementation. bottlenecks, creating a common understanding and Singapore has created the Smart Financial Center, consensus as to ways to address issues surrounding where it has invested $225 million to develop fintech security, privacy and resilience in relation to blockchain or products in a sandbox environment. The sandbox allows reinforcing end-user trust in the technology. Proponents the Monetary Authority of Singapore to develop financial of this approach to regulation argue that it can create technology applications in a controlled environment, tentative, non-binding norms, thus a common vernacular where legal regulations are relaxed, that allows free in a new landscape whereby “harder” forms of legislation experimentation with new products and services.89 may stifle innovation or create barriers to entry. The assumption with the voluntary nature of standards is B. CREATING THE REGULATORY that the industry will converge towards the most optimal ENVIRONMENT FOR SUPPORT standard for the welfare of all stakeholders. However, BLOCKCHAIN INNOVATION WHILE standardization can also become an area of contention ADDRESSING POTENTIAL RISKS among innovators and technology users. To avoid such problems, the international standard setting must abide 94 Blockchain comprises of multiple layers of governance by a set of principles. that interact with each other in its operation. For example, the first layer is the Internet and its protocol (e.g., While proponents of blockchain technology tend TCP/IP) and is followed by the actual blockchain layer to advocate a voluntary arrangement of industry (e.g., Ethereum) on which smart contracts and other standardization, the pace of technological change applications are implemented.90 However, only a small inevitably brings challenges that are fundamental to number of developers have the technical skills and the commercial organizations and the legal system legitimacy required to implement such changes and, entrusted to regulate the market. Such challenges therefore, changes are implemented in a non-democratic relate to the end-users, the service providers and process by a small group of developers. Governance of platforms. Therefore, the question is whether innovative blockchain is, therefore, a significant challenge as the technologies will result in innovative legal frameworks. decision-making process cannot only involve those who This is a pressing question in China, where blockchain build the technology but must also include those who technology and smart contracts are increasingly being will ultimately use it and be affected by the decisions,91 applied as e-commerce continues to expand. It is avoiding the potential scenario whereby only a handful of argued that, even though there is a gap in the existing entities control blockchain technology becomes critical. regulatory framework, the current legal system can Shared governance approaches can ensure that the accommodate or mitigate legal risks presented by perspectives of all who have a stake are considered, smart contracts. On the one hand, it is premature to regardless of whether they are part of the sovereign change the existing legal framework in response to decision-maker’s geographic territory.92 relatively new technology. However, the regulatory framework for platform operators needs to be adjusted 89 See https://www.mas.gov.sg/development/fintech/regulato- to carefully incentivize them to diligently check and ry-sandbox. verify the information of vendors who conduct business 90 Vincent Mignon, 2019, Blockchains – Perspectives and Chal- on their platforms. lenges, in Kraus, Obrist and Hari (eds.), Blockchains, Smart Con- tracts, Decentralised Autonomous Organisations and the Law. 91 Marcella Atzori, 2015, Technology and Decentralized Govern- Despite the rapid advances in technology, many ance: Is the State Still Necessary? 27: https://papers.ssrn.com/ aspects of sophisticated commercial agreements are sol3/papers.cfm?abstract_id=2709713#:~:text=Marcella%20 Atzori,-University%20College%20of&text=In%20 particular%2C%20the%20paper%20verifies,and%20dis- 93 For recent developments in blockchain standardization, see miss%20traditional%20central%20authorities. International Organization for Standardization (ISO) Technical 92 Vint Cerf, Patrick Ryan, Max Senges, 2014, Internet govern- Committee (TC) 307 on Blockchain and Distributed Ledger ance is our shared responsibility, I/S: A Journal of Law and Technologies: https://www.iso.org/committee/6266604.html. Policy for the Information Society, vol. 10(1): https://papers. 94 This is a topic covered by the Technical Barriers to Trade ssrn.com/sol3/papers.cfm?abstract_id=2309772. Committee of the World Trade Organization (WTO). V. Harnessing blockchain for sustainable development 43

not subject to automation, including matters requiring is viewed by some as solving the “single point of failure” human judgement, the rendition of sophisticated or issue. Under most current centralized IT systems where human-intensive services, and the resolution of disputes. the processing of data is entrusted to one single entity, Therefore, the blockchain technology is incapable of in the case of a cybersecurity breach such as hacking, dealing with relatively complex relational contracts due the personal data can be altered or lost. Such issues to the rigidity arising from codes as well as the structure are unlikely to occur when personal data is replicated of decentralization. Hence, despite the claim that across various locations in the blockchain system.97 intermediates will be eliminated due to the decentralized Transparency is also a key aspect of certain blockchain architecture and confidence in relationships enabled by systems, where users may have a clearer understanding blockchain technology, intermediaries will continue to play of how their personal data is used and by whom. an important role, socially and legally. In terms of digital platforms, regulators need to stay alert to misconduct However, even with the most advanced data protection by platforms in their role as gatekeepers. Regulations regulations, such as the GDPR, there are problems with should focus more on the duty of platforms to monitor identifying how each user of blockchain is categorized and verify the information of their vendors. and, thus, how data protection laws may apply. For example, such problems can be seen when considering Specific regulatory issues that arise with the whether every blockchain user is a controller or a joint implementation of blockchain are discussed below. controller, or if data subjects automatically become data controllers too. This is important for determining 1. Privacy security and data protection the legal role and responsibility of each user of the technology. It would also be very difficult to identify Like many web-based services operating worldwide, and hold accountable all participants of large public data protection rules of each jurisdiction in which blockchains. users are concerned would apply for blockchain technology, for which the processing of personal data Some believe that the public blockchain features are across geographical boundaries would be common “on a collision course with the European Union privacy practice. Different territorial jurisdictions may have law” and incompatible at a conceptual level with privacy different laws in place, with some taking the lead protection principles of the European Union General on shaping the future application of data protection, Data Protection Regulation (GDPR).98 privacy, and security in relation to the blockchain. The 95 General Data Protection Regulation (GDPR) in the The GDPR relies on the notion of a “controller” who European Union (EU) is one such example and is the is responsible for compliance with the GDPR.99 In the most advanced regulation at the supranational level current platform economy (with large intermediaries and is likely to be the legal benchmark in privacy and such as Google, Amazon etc.) it would be generally data protection for the digital economy. possible to identify the entity that is the controller. With a public blockchain, there would often be no central The key aspect of blockchain technology is that point of control. information is not stored in a single space but is distributed across various sites known as nodes. No centralized As blockchain technology is set to disrupt existing authority takes control of information processing, as business models, further consideration is needed on how this is done using consensus algorithm on a peer-to- best to regulate it. Without many concrete deployment peer structure known as the distributed ledger – which cases available yet, it is difficult to foretell all impacts mitigates many risks that centralized ledgers faced. that blockchain may have on society, and therefore what Unlike centralized ledgers which are stored in one single exactly this regulation is likely to look like. space, distributed ledgers cannot be destroyed, lost or altered, given that they are spread and replicated across multiple nodes.96 In this regard, blockchain technology 97 Jacek Czarnecki, 2017, Blockchains and Personal Data Pro- tection Regulations Explained, Coindesk, 26 April, available at: https://www.coindesk.com/blockchains-personal-data- 95 Regulation (EU) 2016/679 of the European Parliament and of protection-regulations-explained. the Council of 27 April 2016 on the protection of natural per- 98 Lokke Moerel, 2020, Blockchain and data protection, in sons with regard to the processing of personal data and on DiMatteo et al. (eds.), The Cambridge Handbook of Smart the free movement of such data. Contracts, Blockchain Technology and Digital Platforms. 96 Adrien Alberini and Vincent Pfammatter, 2019, Blockchain 99 The entity that, alone or jointly with others, determines the and data protection, in Kraus et al. (eds.), 2019. purpose and means of the data processing (Art. 4 GDPR). 44 Harnessing rapid technological change for inclusive and sustainable development

2. Financial regulations currency must be considered taxable income.101 Other countries such as Canada and Sweden take a similar The constant evolution of crypto-based technologies approach but can differentiate tax treatment based on being implemented in financial markets transactions is whether the mining is classified as a leisurely activity or a a complex issue for regulators to grasp both legally and business activity. Another possibility is to consider a tax practically. The absence of an international convention treatment that mirrors investments in shares or bonds.102 for regulating blockchain in financial markets, could potentially be problematic given the transnational nature 3. Intellectual property regulations of global finance, coupled with the fact that distributed ledger technology runs across borders. The relationship between blockchain and intellectual property (IP) rights can be viewed from two perspectives: The regulatory approach by different countries or from the developer end, and from the user end. The jurisdictions varies considerably with respect to development of blockchain technology and blockchain- blockchain in financial markets. Some develop ad hoc based applications, although largely based on open- regulations adapted to technology (e.g. Malta, Gibraltar source code, may be subject to various intellectual (United Kingdom) and New York State (United States)), property rights. Copyright, patents and trademarks will while others refer to existing regulations to apply to play an important role in the consolidation or dissemination new activities (e.g. Switzerland). Meanwhile, a few of the technology and could either potentially curb countries have taken a more restrictive approach such innovation by limiting access to newcomers or enable as prohibiting certain blockchain-related investments its diffusion. It is therefore important to consider how (e.g. Algeria and the Plurinational State of Bolivia), IP rights will most stimulate the use and development while many other countries have so far not taken of new blockchain applications. any position. From the perspective of the user end, blockchain can A key consideration is the need to prevent systemic serve the IP system in various ways, not only for the risk vis-à-vis cryptocurrency and financial markets. If defensive protection of IP assets (i.e., for litigation, investors accumulate debt to purchase large sums proving ownership rights, tracking original and counterfeit of cryptocurrency using fiat money, and there is a products, ensuring better revenue for authors/performers, devaluation in the exchange rate, this could lead to etc.) but may also serve as a decentralized ledger for payment defaults in the respective fiat currency.100 unregistered IP rights such as copyright works or for This systemic risk can, of course, be accentuated by the European Union’s design right. Smart contracts in speculative activities which create asset bubbles, as seen blockchains also raise the prospect of eliminating or during the past decade with the Bitcoin cryptocurrency. reducing the need for IP registration, which would not For example, with blockchain technology, a person’s require the intervention of national or regional IP offices. bank record is replicated and synchronized across multiple sites so that no single entity takes control of Blockchain already operates under the IP system, maintaining a single version of the information. given that open source is based on copyright law, which allows for the widespread use of blockchain- Taxation is another regulatory issue which raises several based applications, allowing both developers and users questions that are treated with different tax jurisdictions, to benefit from improvements made in the existing creating legal ambiguity. For tax purposes, the digital or blockchain. The Bitcoin and Ethereum trademark and virtual currencies that are encrypted using cryptography – logos are also based on an open license and can be freely known as tokens – are relevant for determining their scope used by legitimate users such as business accepting and function, and whether the token entitles the owner to payment in the cryptocurrency, thus enabling different receive a payment from a third party. Questions arise as players to enter markets.103 Blockchain could potentially to whether miners (those that process transaction records 101 in the ledger) receiving payment for their mining activities Internal Revenue Service (IRS) Publication No. 525, available at https://www.irs.gov/publications/p525. constitutes taxable income, or whether VAT should be 102 Thierry Obrist and Roland A. Pfister, 2019, Tax treatment of applicable for mining services rendered. In the United cryptocurrency holders and miners in the era of virtual curren- States, the payment received from the mining of virtual cies from a multijurisdictional and Swiss perspective, in Kraus et al. (eds.), 2019. 103 Daniel Kraus and Charlotte Boulay, 2019, Blockchains: 100 Biba Homsy, 2019, Aspects of Swiss financial regulation, in aspects of intellectual property law, in Kraus et al. (eds.), Kraus et al. (eds.), 2019. 2019. V. Harnessing blockchain for sustainable development 45

help with IP management in technology transfer and particularly if they were to be used for anticompetitive commercialization, by allowing patent owners to find practices. There are also differences across different potential licensees for related know-how and trade jurisdictions as to what can be protected under different secrets in connection to a patented invention. forms of IP in blockchain technologies (e.g., the software can be patented in the United States but not the However, blockchain can equally enable right holders European Union), creating legal complexities between to enact restrictive measures, which could negatively different geographical regions in which blockchains influence the development and use of blockchains, operate. 46 Harnessing rapid technological change for inclusive and sustainable development

VI. INTERNATIONAL COLLABORATION

A. SHARING KNOWLEDGE AND efforts to raise awareness on challenges and INFORMATION AND CONDUCTING opportunities of blockchain innovation, sharing RESEARCH successful examples on the use of blockchain technology for sustainable development with The application of blockchain technology is a very recent countries that are late to integrate the technology phenomenon, and its long-term implications are not yet to their innovation ecosystem. It is critical for clear. Research forms the foundation for consensus the international community to continue to building, policy advocacy and technical assistance compile, analyse and disseminate information activities. Several United Nations agencies have worked about these cases to raise awareness and inform on research, policy analysis and data collection, both the application of blockchain for sustainable regarding potential economic and social impacts and development. policy and regulatory responses. (b) Blockchain Innovation Strategy Assessments. For example, UNCTAD has examined the impact of UNCTAD, as the secretariat of the Commission, frontier technologies, including blockchain, in its 2018 and in collaboration with other agencies of the and 2021 Technology and Innovation Reports, with the United Nations system, could conduct research 2021 edition focusing on the impact on inequalities. It and analysis focused on innovation system, has also examined the status and trends of the digital policy and regulatory frameworks in developing economy and e-commerce in its Digital Economy countries for harnessing blockchain innovation Reports. WIPO has established the Blockchain Task for sustainable development. This can be done Force under the Committee on WIPO Standards (CWS) by taking stock of the potential for innovation and to explore the possibility of using blockchain technology diversification into sectors that are at the core of in the processes of providing intellectual property (IP) the blockchain innovation ecosystem. Technical rights protection and prepare a proposal for a new support could be provided through workshops or WIPO standard supporting the potential application country-specific blockchain innovation strategy of blockchain technology within the IP ecosystem. To assessments. The findings of these studies support the activities of the Task Force, WIPO Secretariat could be discussed at the Commission to raise is developing a Blockchain whitepaper for IP ecosystem, awareness and build a common understanding which is exploring the impact and potential use cases of of the international cooperation for harnessing the blockchain technology in the IP space. ESCAP has blockchain for sustainable development. been observing, reviewing, collecting, and documenting examples in the region of where blockchain technology B. HELPING TO SET GUIDELINES, NORMS has had the biggest developmental impact. ESCAP AND STANDARDS has strengthened the awareness of network through the delivery of several policy sessions at the Global As discussed in chapter IV, the adoption of blockchain Forum on Human Settlements in Bangkok in September technology has unintended consequences related to 2019, Seventh Asia Pacific Urban Forum (APUF7) in privacy and security. These two points are issues that Jakarta in October 2019, and through the expert group are at stake with the blockchain technology and need meetings (water cycles and the blockchain technology recommendations on regulation from international for sustainable development in June 2019). organizations. As the potential implications are becoming clearer to Governments, there is a growing need for The Commission on Science and Technology for policy guidance, training, global regulation, and standard- Development of the United Nations could consider setting to guarantee a fair and responsible adoption of the following areas for strengthening international the technology in developing countries. collaboration: In this regard, the United Nations/CEFACT, alongside its (a) Coordinate awareness-raising. The Commission advisory group on advanced technologies, is looking at could coordinate the international community’s developing a blockchain-based environment/framework VI. International collaboration 47

in which trustworthy, common identification and would be needed to harness blockchain innovation for communication interchange is facilitated. This aims at sustainable development while reducing risks. They creating a trustworthy context for Blockchain to enhance usually have low capacity and resources to keep abreast its benefits and reduce risks. United Nations/CEFACT of the developments in the technology and the innovation is looking at developing interoperability of message ecosystem. International organizations should support exchange to promote a global regulation and framework these governments, particularly in low- and lower- for blockchain, enabling blockchain to fully deploy its middle-income developing countries, including the least benefits for all the Sustainable Development Goals developed countries, in building their national capacities under the 2030 Agenda, while minimizing the risks. in engaging with blockchain innovation and promoting United Nations/CEFACT created the United Nations/ the required institutional change. CEFACT Standards and UNECE Recommendations to provide a global basis for interoperable semantic In this regard, UNCTAD assists developing countries, data exchange, including UNECE Recommendation in particular LDCs, LLDCs and SIDS, to address the on Single Window and Recommendation on Single challenges and opportunities in relation to innovation Submission Portals (SSPs) together with over 200 UN/ strategies, trade facilitation and e-commerce and to CEFACT data exchange standards of United Nations/ develop their international trade capacities. To this EDIFACT UNSMs and the United Nations/CEFACT end, UNCTAD offers a range of technical cooperation Reference Data Model subset XML Schemas, which are and capacity-building activities for which it would be based on the United Nations/CEFACT Core Component worthwhile exploring the integration of components on Library (CCL). These include the Electronic Sanitary the blockchain, such as UNCTAD STI Policy Reviews, and Phytosanitary Certificate (eCERT) schemas, the Empowerment Programme for National Trade Facilitation Electronic Consignment Note (e-CMR) schema. Committees, the Rapid eTrade Readiness Assessments, E-commerce, and Law Reform Programme and the Based on this example, the international community ICT Policy Reviews. could consider: UNIDO has developed a methodological framework (a) Promote the development of standards, to assess the readiness of a commodity value chain recommendations and regulations. The to adopt blockchain technology. The objective of the international community should promote the methodology is to address a general approach to assess development of standards, recommendations and a value chain from a data-sharing perspective and regulations on blockchain, to harness its potential, to go into the specific requirements that come with including promoting privacy and security. This implementing blockchain technology. The methodology can also be done through studies, reports, white has been set up in such a way that it can be applied to papers and any other relevant documentation. assess the feasibility and readiness to adopt blockchain for any commodity value chain from any sourcing country. (b) Intergovernmental consensus-building. The Commission on Science and Technology ESCWA has explored the potentials of Blockchain for Development could play an essential role technologies on the provision of its services to in promoting international best practices, member countries within its mandate related to international guidelines and legal frameworks social and economic affairs. For example, ESCWA governing the blockchain. The impact could is considering the use of Blockchain technologies in be maximized by building and strengthening managing COVID-19 in airports in partnership with the collaboration ties with existent initiatives of the International Chamber of Commerce and OakPass. United Nations system. Some Arab countries (ESCWA member States) have been considering several applications of Blockchain C. HELPING BUILD THE CAPACITY OF in their development processes as well. Additionally, GOVERNMENTS TO PLAY ITS ROLE IN THE ESCWA has been exploring the provision of member BLOCKCHAIN ECOSYSTEM, INCLUDING IN States with policy advice and policy support in this area. TERMS OF OVERSIGHT CAPABILITIES UNECE has an active project focusing on enhancing Governments and regulators in developing countries transparency and traceability in the garment and would face many challenges in designing and footwear sector through blockchain. It has been implementing the required institutional changes that proven by UNECE experts that brands only have a 48 Harnessing rapid technological change for inclusive and sustainable development

limited overview of their value chains. Only around • Public registry: UN-Habitat has implemented a system 34 per cent of fashion companies implement tracking to record land ownership in a digital registry which and tracing in their supply chain, and companies can then serve as the basis for other government usually only have control or overview of the value services such as urban planning, citizen engagement chain process that does not go further than the and revenue generation.105 manufacturing and assembling of the product (UNECE study, 2019). UNECE, alongside its partners (ILO and • Supply chain tracking: UNDP is piloting a system ITC), is launching a pilot to create a digital identity where the purchaser of a chocolate bar receives an for a cotton shirt by connecting it to sustainability impact token which can be sent back directly to the certificates. It is proven that the cotton sector has cocoa farmer to expand its cocoa tree plantation major environmental and social impacts, which are or for the consumer to be used as a discount on 106 higher than for other textile fibres.104 other products. • Digital finance: WFP and UN-Women have used The international community could consider the following blockchain in refugee camps to track cash entitlements recommendation to strengthen international cooperation that are disbursed to the people WFP serves. Cash in this area: value from WFP is stored in an ‘account’ for individual recipients and is maintained on the blockchain. That (a) Training programmes. The international cash can be spent on goods and services from community could contribute to developing approved retailers. The transactions are recorded in content-specific training programmes for a blockchain where the identity of refugees is secured countries and institutions planning to implement with the existing biometric authentication technology a blockchain-related solution to provide them of UNHCR. WFP has a record of every transaction. with relevant information about the technologies’ This not only saves on financial transaction fees in capabilities and limitations. the camp setting but ensures greater security and privacy for Syrian refugees. The project currently (b) Know-how transfer programmes. The coordinates the delivery of food assistance for over international communities can execute 100,000 Syrian refugees.107 UNICEF has used smart complementary know-how transfer programmes contract in Kazakhstan to streamline processes (including applied training programmes or projects related to cash transfers between UNICEF and its in executing the transformation of a country’s implementing partners on the ground. It also improved public service applications with blockchain the transparency and accountability of partnerships technology) that allow engaging ecosystem and related transfers of resources. The platform has actors with pioneer countries and less developed allowed for streamlined verification of the results ecosystem owning countries. achieved by partners and allowed the blockchain- based smart contract to release the payment (c) Decision-making tools. Similarly, the international automatically after verification and authorisation. It community could support Governments with has showcased how smart contracts can be used to 108 decision-making tools to invest or not to invest in expedite the processing of paperwork and payment. new technologies and increase the preparedness • CryptoFund: UNICEF built its own cryptocurrency- countries to adopt and adapt new technologies. fund, called the CryptoFund which makes investments into startups in the form of bitcoin or ether. By D. USING BLOCKCHAIN IN UNITED NATIONS providing funding in the form of cryptocurrency, OPERATIONS there is the transparency of where funds come from, where they are invested and where the investees use The United Nations system started to develop projects their funds. Bitcoin and ether allow the transfers to based on blockchain technology very recently. In the take place in a few seconds, regardless of where the past three years, a few projects have been implementing in many of the various applications allowed by the 105 See https://reliefweb.int/report/afghanistan/city-all-investing- blockchain technology. sustainable-urbanization-afghanistan. 106 See https://www.fastcompany.com/90413242/this-new- blockchain-chocolate-bar-is-brought-to-you-by-the-un. 104 See http://www.unece.org/tradewelcome/traceability-for-sus- 107 See https://innovation.wfp.org/project/building-blocks. tainable-garment-and-footwear.html. 108 See https://www.unicef.org/innovation/blockchain/digicus. VI. International collaboration 49

investees are around the world. This new asset class which allow for the creation of micro-tasks incentivized allows UNICEF to leverage a new donation type.109 through a token.113 UNIDO has leveraged blockchain in a Sustainable Development Goal accelerator fund to streamline The United Nations Centre for Trade Facilitation and financial opportunities to the advantage of SMEs e-business (United Nations/CEFACT) – a subsidiary moving towards the circular economy. The project body of the UNECE – is running a United Nations inter- uses blockchain to conduct impact investment agency round table called “Blockchain for the Sustainable verification activities. The project has been recently Development Goals” in the aim to update each United renamed as Sustainable Development Goal Impact Nations organization on the ongoing work with regards Investment Platform (SIIP) and is currently under to DTL as well as share know-how. This project has review.110 been ongoing since the month of May 2019 and groups organizations, such as the [Sustainable Development Sustainability Map: In 2019, ITC explored using • Goal] SDG Lab, UNECE, IOM, ITC, ITU, JIU, UNAIDS, blockchain technology to improve visualization of UNCTAD, UPU, WFP, WHO, WIPO and WTO. Sharing transparency, traceability and accountability on updates on the work each other and know-how mean voluntary sustainability standards. ITC used its that the intention is to seek to understand the full possible Sustainability Map tool, which helps businesses, implementation of blockchain to realize every Sustainable regardless of their position in value chains, chart their Development Goal of the 2030 Agenda. part toward more sustainable trade as a transparency and traceability platform. The purpose of the pilot initiative was to visualize blockchain-based supply As a way forward, the United Nations and the international chain traceability data from multiple companies community could consider: and sources, to support a culture of transparency (a) Continue exploring the use of blockchain in and mutual accountability across global networks projects implemented by the United Nations while providing consumers with the sustainability system: The United Nations system could continue information they demand.111 to invest in blockchain solutions for their operations Agencies in the United Nations system have also involving data protection, authentications and established networks to share experiences and certification. This is paramount as it involves information on the implementation of solutions using not only technical initiatives but legislation and blockchain. The United Nations Innovation Network regulations to pace up with the breakthroughs (UNIN) has set up a Blockchain Group to raise awareness stemming in the blockchain. within the United Nations system and share experiences (b) Establish a partnership’s framework: The United in the implementation of applications using blockchain Nations could facilitate the establishment of a technology including related to cash and remittance framework to encourage partnerships to capitalize transfers, supply chain tracking, record keeping, digital on the use of blockchain for development, for identity and increasing transparency.112 The Atrium is example, to lay the foundation for the inclusive a platform that focusses on encouraging cooperation digital economy in the developing regions. between United Nations agencies by stimulating learning and knowledge transfer of both IP and experience (c) Share know-how and experiences: The between United Nations staff members interested in international community should create inter- blockchain technology. An underlying private permission agency meetings to share know-how, experiences blockchain has been set up to enable the use of Remix and ways forward to realize the Sustainable – a smart contract development and deployment tool Development Goals through blockchain. The – and provision of tokens via the Bounties platform – international community should look at existing and developing standards, recommendations, 109 See https://www.unicef.org/press-releases/unicef-launches- regulations to explain blockchain, harness its cryptocurrency-fund. potential and promote its privacy and security. This 110 UNIDO, 2019, SIIP: Enabling private financing of SMEs to can also be done through studies, reports, white facilitate more circular business models, available at https:// www.unido.org/siip (accessed on 8 April 2020). papers and any other relevant documentation. 111 Contribution from ITC, available at https://unctad.org/system/ files/non-official-document/CSTD_2020-21_c14_B_ITC_ 113 Contribution from WFP, available at https://unctad.org/sys- en.pdf. tem/files/non-official-document/CSTD_2020-21_c41_B_ 112 See https://www.uninnovation.network/blockchain. WFP_en.pdf. 50 Harnessing rapid technological change for inclusive and sustainable development

ANNEX

BLOCKCHAIN GLOSSARY

Concepts Definition

Altcoin Altcoin (short for ‘alternative coin’) is any cryptocurrency other than Bitcoin. Many altcoins are forks [see below for definition] of Bitcoin with minor changes; there are hundreds of altcoins being traded around the world: Litecoin, Monero, and Dash.

51% Attack This concept describes the situation in which more than half of the blockchain network’s power is controlled by a single entity or group, this entity or group can manipulate it on purpose or conduct conflicting transactions that can compromise the system.

ASIC – An ASIC is a silicon chip designed specifically for a certain task. In the world of blockchain, ASIC Application usually refers to chips developed to run on mining computers and is considered superior to CPUs Specific and GPUs due to its capacity to significant electrical power savings. Integrated Circuit

Bitcoin Bitcoin is the first decentralized, open-source cryptocurrency that runs on a global peer-to- peer network, without the need for a centralized issuer. Bitcoin was created in 2009 by Satoshi Nakomoto – a pseudonym for an individual whose real identity is unknown – and the concept of cryptocurrency was outlined in a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. Bitcoin is the first real-world application of blockchain.

Block Blocks are packages of data that carry permanently and digitally recorded data on the blockchain network.

Blockchain Blockchain is a cryptographic protocol that allows separate parties to increase the trustworthiness of a transaction, it is comprised blocks (see above for definition), and each block is “chained” to the next block using a cryptographic signature. This allows blockchains to act like a ledger (see below for definition), which can be shared with and accessed by anyone with the appropriate permissions. Some examples of blockchain-based cryptocurrencies are Bitcoin, Litecoin, Monero and Dash, to name a few.

Cryptocurrency A cryptocurrency is a digital currency based on mathematics and uses encryption techniques to regulate the creation of units of currency as well as verifying the transfer of funds. It is designed to operate independently of a central bank, with each token (see below for definition) and transaction uniquely encrypted.

Crypto-fiat Crypto-fiat currency is a digital currency issued and governed by national central banks. currency

DAO – This concept describes an organization whose decisions are made electronically by written Decentralized computer code and manage itself without the need for a central authority. Autonomous Organization

DeFi – DeFi refers to the economic paradigm shift enabled by decentralized technologies, particularly Decentralized blockchain networks. DeFi represents a shift from a centralized and closed financial system finance to a universally accessible economy that is based on open protocols that are interoperable, programmable and composable.

DLT – DLT refers to the practice that uses nodes (see below for definition) to record, share and synchronize distributed transactions in their respective electronic ledgers (instead of keeping data centralized as in a ledger traditional ledger). The participant at each node of the network can access the recordings shared technology across that network and can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes. Annex 51

Concepts Definition

Ethereum Ethereum is a blockchain-based decentralized platform for applications featuring smart contracts (see below for definition) functionality. It is aimed at solving issues associated with censorship, fraud, and third-party interference. Ethereum is the second-largest cryptocurrency platform by market capitalization, behind Bitcoin. Ethereum provides a decentralized virtual machine, the Ethereum Virtual Machine (EVM), which can execute scripts using an international network of public nodes. Ethereum was proposed in late 2013 by Vitalik Buterin, a cryptocurrency researcher and programmer.

Ether (ETH) Ether is the cryptocurrency generated by Ethereum miners as a reward for computations performed to secure the blockchain. Ether functions as a fuel of the Ethereum ecosystem by acting as a medium of incentive and form of payment for network participants to execute essential operations.

Fiat currency Fiat currency is government-issued currency (instrument of exchange, store of value and unit of account) whose value is not backed by a physical commodity, such as gold or silver, but rather by the Government that issued it. The value of fiat currency is derived from the relationship between supply and demand and the stability of the issuing Government. Most modern paper currencies are fiat currencies, such as the United states dollar and the euro.

Fork A fork creates an alternative version of a blockchain and is often enacted intentionally to apply upgrades to a network. Since blockchain is decentralized, each change to the network has to be accepted by its users in order to go through. If enough users accept an upgrade or code change, it is rolled out across the network. A change which still recognizes and supports older versions of the blocks is called a soft fork, while one which makes it backwards incompatible (not compatible with older versions) is called a hard fork, thus requiring all participants to upgrade to the new version in order to be able to continue participating on the network.

Hash Hash is the practice that takes an input, and then outputs an alphanumeric string known as the “hash value” or “digital fingerprint”. Each block in the blockchain contains the hash value that validated the transaction before it followed by its own hash value. Hashes confirm transactions on the blockchain.

Ledger A digital log of all of the transactions which took place on a certain blockchain network. Copies of the ledger are stored across the network and are constantly updated to match each other so that transactions can be verified by all participants on the network.

Mining Mining is a peer-to-peer computer process of allocating computer power to carry out transactions on the network and being rewarded with tokens (see below for definition). Cryptocurrency mining is the digital equivalent of a miner striking gold in the ground – while digging in a sandbox. Each transaction is encrypted by complex computational math problems which require significant computing power to be processed. Miners who solve the computational math problems first, thus enabling the transaction to take place are rewarded with cryptocurrency payments.

Natural asset Natural assets represent the global stockpile of natural resources, such as gold, oil, gas or even tokens carbon and water. Natural asset tokens represent the value of these tangible goods in peer-to-peer markets with a real-time settlement.

Node A node is a system on the network that operates a full copy of validated transactions of the blockchain ledger (see above for definition). Any computer connected to the blockchain network is referred to as a node. In some blockchains, such as Bitcoin and Ethereum, all nodes participate in the consensus process, in others, it may be only be selected nodes. 52 Harnessing rapid technological change for inclusive and sustainable development

Concepts Definition

Peer-to-peer Peer-to-peer (P2P) refers to the decentralized interactions between two or more parties in a highly interconnected network. Participants of a P2P network deal directly with each other through a single mediation point.

Private key A private key is a digital code known only to the user and could be equated with a password. Each participant on the network holds a private key.

Proof of stake Proof of stake is a consensus distribution algorithm which determines which users are eligible to add new blocks (see above for definition) to the blockchain, thus, earning a cryptocurrency payment as mining fee. Using this method, of the users who participate in the mining process, those with more tokens are favoured over those with less.

Proof of work Preceding proof of stake, proof of work is a consensus distribution algorithm used to decide which user is eligible to create a new block (see above for definition]. However, with the proof of work method, eligibility is determined by computing power and not by the miners’ digital wealth.

Public key A public key is a digital code obtained and used by anyone to encrypt messages before they are sent to a known recipient with a matching private key for decryption. The public key encrypts a message into an unreadable format, and the corresponding private key makes it readable again for the intended party; therefore, no intermediary is required.

Security token A security token is a type of digital asset that represents its value from some other external tradable asset. Security tokens can both represent real-life material assets, such as square meters of real estate or grams of gold and non-material assets, such as companies’ shares. Therefore, the security token provides the rights of ownership over a part of a company and can be traded peer-to-peer without financial intermediaries. The process of generating security tokens is called a security token offering (STO), which is a type of fundraising that is performed with a company offering tokenized securities.

Shard A shard is a horizontal partition of data in a database or network. Each shard is held on a separate database server to spread workload with the purpose of scalability, enabling the network to process more transactions at the same time.

Stablecoin Stablecoin is any cryptocurrency whose value is pegged to a stable asset, such as fiat currency (see above for definition) or gold. Therefore, a stablecoin is an asset that offers price stability characteristics as it is measured against a known amount of an asset not subject to high fluctuation.

Smart contract Smart contracts are the second-generation blockchains. While Bitcoin only records monetary transactions of ownership of the cryptocurrency, second-generation blockchains expand it to incorporate programming languages allowing for more customizable transactions. These smart contracts consist of all the clauses and conditions that are transparent to all nodes, when the terms of a smart contract are met, the contract will be automatically executed, with the participating parties being rewarded according to the contract’s terms. Therefore, this second generation of blockchain turns the blockchain into a programmable protocol that can operate more than the cash-like tokens transactions allowing other financial instruments, such as loans or bonds, to be represented. Some platforms run based on smart contracts are Ethereum, Ethereum Classic, NEO and QTUM, to name a few. Annex 53

Concepts Definition

Token A token is a unit of value related to a specific blockchain network, representing its currency, giving value to transactions within the network. For example, the Bitcoin network’s token is called BTC, and the Litecoin network’s token is called LTC.

Timestamp A timestamp server works by taking a hash (see above for definition) of a block of items to be server timestamped and widely publishing the hash across the blockchain. The timestamp proves that the data must have existed at the time in order to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it.

Turing- Turing machines can compute precisely the class of problems that can be solved algorithmically. completeness A system of data-manipulation rules such as a programming language is said to be Turing-complete or computationally universal if it can be used to simulate any Turing machine. Therefore, Turing- completeness refers to a system of data-manipulation rules that, given enough time and memory along with the necessary instructions, can solve any computational problem.

Utility tokens A utility token is a digital asset that grants the owner of the token (see above for definition) a specific right in the usage of a company’s products like being first to access it or getting other privileges. The major difference between security tokens and utility tokens is in the intended use and functionality of the tokens. Utility tokens do not provide the rights of ownership over a part of a company; therefore, utility tokens are not created to be an investment. Blockchain offers a platform that can be used to create a voting system that allows investors to exercise control over the company’s decision-making process. Utility tokens are not intended to give their holders the ability to control how decisions are made in a company; instead, they help companies to gain funding without losing their independence. Utility tokens are often used for Initial Coin Offerings (ICO). 54 Harnessing rapid technological change for inclusive and sustainable development

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HARNESSING BLOCKCHAIN FOR SUSTAINABLE DEVELOPMENT: PROSPECTS AND CHALLENGES

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